6 Tips to Avoid Payroll Tax Mistakes and Penalties
Did you know that 33% of small businesses face penalties because of simple and avoidable payroll tax mistakes? Many businesses still calculate their taxes manually leading them to make mistakes as they go. If they don’t do something about it, they could end up with an expensive slap in the wrist from the IRS.
Managing the company’s payroll on top of other responsibilities is one of the challenges that entrepreneurs must face head-on. They have to do it right if they want their business to stay open. Even start-up business owners should have a good grasp of it. This is the only way for them to avoid paying thousands of dollars for fines and penalties
Mistakes in payroll are difficult to correct. That is why as a business owner, it’s important to do everything right the first time. With that said, here are some of the most effective tips to help you steer clear of payroll tax mistakes:
1. Automate Payroll System
Manually calculating your employees’ payroll is not only time-consuming, but it’s also inefficient. Plus, business owners still have to compute the mandatory taxes that are deducted from their employees’ paycheck. This makes payroll management even more tedious.
Automation, on the other hand, gives you a chance to let go of those tasks and focus on other areas, instead. Having a reliable payroll management software can make the payroll process more efficient. This can also lead to lesser mistakes made and helps you arrive at more accurate results. In this way, you can save time and avoid paying expensive penalties. With an automated system, you can have the numbers within seconds and pay the right amount to the IRS.
2. Avoid Missed Deadlines
Missing payroll tax deadlines is one of the damaging things you can do for your business. Missed deadlines can lead entrepreneurs to pay thousands as a penalty, and in some cases, suspension of their business license.
If somehow you missed the tax deadline, contact the tax agency immediately. Late payment penalties can pile up quickly. So, the sooner you get in touch with the agency, the lesser penalty you’ll pay.
The IRS also has a Calendar Connector that helps entrepreneurs remember tax deadlines. You can use this to organize put your taxes in order and make sure that you never miss a deadline again.
3. Classify Your Staff Accordingly
Be sure to separate employees from individual contractors. A lot of companies often make the mistake of misclassifying their staff. The IRS eventually finds out and the company will end up paying thousands for the fines, taxes, plus the interest.
It’s best to classify your employees in the beginning. Let the regular employees fill out a Form W-2, so you can deduct and pay their taxes. For individual contractors, have them fill out a Form 1009. This way, they will be responsible for paying their taxes, not you.
4. Secure Your Budget for Payroll Tax Payments
Employees and employers have to pay for payroll taxes. Business owners, especially owe a big share of it, especially if they have more than one employee. With that, it’s always important to have a budget set aside for when the day for the tax filing comes. Even before the filing season, be sure to prepare the necessary amount. If it helps, open a separate account for the collected taxes.
Once you have that, never attempt to borrow from it if you find yourself on a cash crunch. You can apply for a short-term business loan, but don’t take anything from the tax contributions. You could end up not only with penalties but with legal charges, as well.
5. Double Check Employees’ Information
Always check your each of your employee’s information. Filing taxes with an outdated employee’s information data could get you in trouble with the IRS.
Be sure to double-check the following before filing the taxes to the IRS:
- Employee’s full name
- Start or termination of employment
- Updated addresses
- Tax file numbers
- Payroll details (rates, wage, employment period)
Update the database immediately if one of these information changes. This will help avoid mistakes and make payroll taxes easier to account for.
6. Stay on Top of IRS Announcements
The rates for taxes often change yearly. When employers are unaware of the changes, they could face penalties. Claiming ignorance of the law is never an acceptable reason for the IRS. Even if the mistake was unintentional, you can still face penalties.
As much as possible, stay on top of the news. The IRS announcements usually come out before the tax filing season, so stay tuned to it. It’s also important to pay attention to the laws and guidelines of each state when it comes to employment taxes. Make sure that you know the tax regulations on the state in which your employee works in and follow that.
Avoid Payroll Tax Penalties at all Cost
Mistakes in payroll taxes happen to small businesses all the times. And most of the time, they could face expensive fines which puts the stability of their cash flow at risk. That is why there is a need for these businesses to create a better payroll system in their company. As a business owner, you have to do everything right to keep your business thriving.
Payroll taxes are expensive and the amount could take business owners off-guard. But, if you miss the deadline or make mistakes in the calculation, it could cost your business even more. With that, it’s always recommended to familiarize the IRS’s rules and regulations when it comes to payroll taxes. Even if the process it tedious, it will help protect your business from potential financial losses and closure.