Every employer is responsible for payroll taxes. Whether you have hundreds of employees or even just one, you need to make sure to do them correctly. This is a big responsibility, and it is imperative to do it the right way in order to avoid any penalties. The following are three common mistakes every employer needs to look out for when dealing with payroll taxes.
1. Misclassifying Your Workers
This might be the most typical audit issue today. It is important to know that the way compensation gets reported to the IRS is different depending on the classification. Workers are generally classified as either employees or independent contractors. Because payroll taxes and employee benefit costs are high, there is usually an impulse to treat workers as independent contractors instead of employees. The reasoning behind this is that for independent workers, the only tax responsibility for a company is to issue a Form 1099-MISC if payments in the year are $600 or more. If for some reason there is an improper classification, the Voluntary Classification Settlement Program (VCSP) allows eligible employers to reclassify workers as employees on a prospective basis and get into compliance by paying 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year.
No employer has the freedom to decide a worker’s classification. Classification depends on whether the employer has sufficient control over the worker, meaning that the employer has the right to decide when, where, and how the work gets done. If the worker is an independent contractor, an agreement showing that there is no intent for any employer-employee relationship may be helpful, but it won’t bind the IRS.
If there is any doubt about a workers classification, it is important to consult your tax adviser or the IRS.
2. Failing to Keep Payroll Records
Every employer is required to maintain all payroll records and always have them available for the IRS. Payroll records may include time sheets, expense accounts, W-2s, I-9 forms, as well as any other records required by the IRS. This information is usually kept for at least four years. In order to have certainty that you will have these records available at all times, it is important to have them somewhere safe. It is time to go paperless and start using the cloud. Two advantages of using this option for storing your data instead of others is that your information will always be accessible anywhere there is internet connection, and your files are less likely to get lost because of backups.
To learn more about the cloud check out our blog "Why Use the Cloud".
3. Failing to Monitor Payroll Company Activities
Outside payroll companies are usually used by small businesses to help figure out withholding and transferring funds to cover payroll taxes. It is important to know that these companies may not do their job sometimes. Because of this, every employer should be aware that they are still responsible for payroll taxes and should always be on top of things. As an employer, the best way to protect yourself is to always monitor your tax account to see what funds are being deposited on time and in the correct amount.
In conclusion, as an employer, it is your responsibility to protect your company and avoid any penalties or issues with the IRS. If you are interested in learning more about Dominion's products, click below to watch a demo.