Payroll is undoubtedly complex and an administrative burden. The risk of ‘getting it wrong’ comes with a high price. Employers can face fines and penalties from the IRS, state governing bodies and the Department of Labor (DOL), to name a few.
Furthermore, payroll mistakes can lead to costly missed opportunities. With that in mind, we would like to highlight a few of the most common (and costly) payroll mistakes you could be making with your in-house payroll.
- Employee Classifications: Employee classifications come with a ripple effect of implications. From exempt vs. nonexempt to part-time vs. full-time, etc., it is critical that you take the time to get it right. Employee classifications have an impact on benefits, overtime and paid time off.
Did you know? There are strict rules that need to be followed to classify an employee as exempt, including directing the work of others to having decision-making authority. Another classification to consider is independent contractor vs. employee. The main differentiator between the two is whether or not the employer directs the work of the individual or not. While you could study up on IRS, state and DOL rules, why not leave it to the professionals and avoid the fines, penalties and audits?
- Recordkeeping: Recordkeeping is critical when running a business. The Fair Labor Standards Act (FLSA) requires employers to maintain three years of payroll-related records. On top of the FLSA requirements, many states have rules related to recordkeeping that surpass the three-year requirement set out in the FLSA.
Did you know? I-9 documentation needs to be maintained outside of or separately from the personnel file. This is a legal requirement as commingling these records could be perceived as potential discrimination. Please note – I-9s have their own retention requirements that are greater than three years and governed by DOL.
- Failing to Report Taxable Compensation: Failing to report taxable compensation, also known as compensating employees outside of payroll, is another large payroll risk. Bonuses, stock options, employee discounts, etc., are all subject to federal income and employment tax withholding. These errors do not go unnoticed, leaving employers to face significant penalties.
- Payroll Deductions: Payroll deductions are the items that make up the difference between gross and net pay. Mandatory deductions include federal, state and local taxes; and garnishments. Voluntary deductions include retirement plans, health insurance, life insurance and commuter benefits to name a few. Between the number of deductions and unique situations that present themselves for each employee, payroll deduction compliance can get out of hand quickly. Having the right systems and onboarding process in place can prevent/minimize errors related to payroll deductions. For in-house providers, these solutions can be costly.
- Overtime Rules: There are both federal and state rules related to overtime. In addition, overtime rules go beyond hours worked in a day/week. This means you need to have a system in place to properly track hours and capture all of the requirements accurately. What makes this area tricky is that each state has its own rules. Like payroll deductions, having the right systems in place can prevent or minimize errors, but these tools come with a steep cost.
- Missed Opportunities: Lastly, we’d like to highlight that we too often see money left on the table from missed opportunities. These areas include the Work Opportunity Tax Credit (WOTC), FICA tip credit and worker’s compensation.