Payroll Taxes Explained: FICA, Withholding and More
From Tax Guide.
Tax Guide · Arab, Alabama
Payroll Mistakes to Avoid and How to Fix Them
The most common payroll errors small businesses make, from late payroll deposits to misclassified workers, and what to do if you have already made one.
The short answer
What are the most common payroll mistakes?
The most common payroll mistakes are late tax deposits, treating employees as contractors, missing or wrong forms, and poor records.
Payroll leaves little room for guessing. Each mistake can bring penalties and interest, and some, like unpaid withheld taxes, can lead to personal liability for the people in charge. The good news is that most errors are avoidable with a routine and a checklist.
- Depositing payroll taxes late or not at all
- Classifying employees as independent contractors
- Not collecting a Form W-4 or work eligibility form
- Using the wrong tax figures or an out-of-date table
- Missing quarterly returns or year-end forms
- Mixing personal and business funds when paying taxes
- Ignoring a payroll notice
Deposits
What happens if I make late payroll deposits?
Late payroll tax deposits can bring penalties and interest, and the penalties may grow the longer the deposit is late.
The IRS assigns each business a deposit schedule, and it applies whether or not the business had a good month. Using the withheld money to cover other bills is a common way a small business gets into serious trouble, because that money belongs to the government. Read payroll tax deposits and Form 941 for how deposits work.
If you have missed a deposit, make it as soon as you can and keep proof. Penalty relief may be available in some cases, but we cannot promise it. Call the office and we can review your options.
Worker status
What is worker misclassification and why is it a problem?
Misclassification means treating someone as an independent contractor when the working relationship is really that of an employee, and it can lead to back payroll taxes and penalties.
The IRS and Alabama agencies look at how much control the business has over the work, not what the agreement says. Paying someone on a 1099 does not, by itself, make them a contractor. See employee or independent contractor for the factors involved.
If you have already treated someone incorrectly, there are ways to correct it, and the sooner the better. Do not ignore it and hope it goes away.
Paperwork
What paperwork errors cause payroll trouble?
Missing or wrong forms are a steady source of payroll trouble, and most can be prevented with a new-hire checklist and a yearly review.
Examples include a missing Form W-4, an incomplete work eligibility form, a W-2 with the wrong name or number, and returns filed late. Errors on a W-2 can cause problems for the employee as well as the business. Ask employees to review their information before year end.
Federal and state returns must match your payroll records. If the totals you report do not agree with what was deposited, expect letters. Our guide on what to do with an IRS notice explains the first steps.
Records
What records should I keep to avoid payroll problems?
Keep a complete file for each employee and for each payroll, because those records prove what you paid and deposited.
That means time records, pay records, signed forms, proof of each deposit, filed returns and correspondence with the agencies. Employment records are generally kept longer than the basic three years, so ask before discarding anything.
A separate bank account for payroll taxes can help keep withheld funds from being spent on other things. It is a habit worth building early.
Fixing errors
How do I correct a payroll error?
The fix depends on the error, but it usually means filing a corrected return or form, paying what is owed and documenting what changed.
Some errors are fixed with an adjustment on the next return, while others need an amended return or corrected W-2s. Rules differ between the IRS and the state, and rules change, so we confirm the current procedure before you act.
If you already have a notice, do not respond in a hurry without your records. Keep a copy of everything and call the office, since our tax representation service can review the notice and respond to the agency on your behalf.
How we can help
How Melton Tax Services can help you avoid payroll errors
Our payroll and bookkeeping service can run your payroll routine, keep the records and help you catch problems early.
Through payroll and bookkeeping, we help small businesses stay on top of payroll paperwork. If you already have a problem, we can look at where you stand and explain your options.
We serve Arab and the surrounding area. Call 256-586-4635 or use our contact page. Bring your paperwork to the office, and please do not send Social Security numbers or documents through the website.
Answers
Questions about payroll mistakes
What is the penalty for a late payroll tax deposit?
Penalties and interest can apply, and the amount depends on how late the deposit is. We do not quote figures because they are set by law and can change. Call us to review your case.
Can I fix a payroll mistake from a past quarter?
Often yes. The correction may involve an amended return or corrected forms, and rules differ by agency. Bring your records and we will review them.
What if I paid a worker as a contractor who should have been an employee?
You may owe payroll taxes for that worker. There are ways to correct the situation, and it is better to address it before an agency raises it. Ask us to review the facts.
Do I need to keep payroll records after an employee leaves?
Yes. Employment records are generally kept for several years after the last filing, and longer in some cases. Ask us before you discard them.
What if I cannot afford to make my payroll tax deposit?
Do not skip it quietly. Contact the office to review your options, because coming forward early generally leaves more options than staying silent.
Is it a mistake to run payroll myself?
Not necessarily, as long as you keep to the schedule and the rules. Many owners do it well. The risk comes from lacking a routine or an up-to-date knowledge of the requirements.
Read next
Related reading
Employee or Independent Contractor?
From Tax Guide.
Payroll Tax Deposits and Form 941
From Tax Guide.
Got a Letter From the IRS? What to Do
From Tax Guide.
Payroll and Bookkeeping
A service Melton Tax Services provides.
Melton Tax Services
Questions about your taxes or your business?
Our team in Arab is just a phone call away, and we are glad to talk it through with you.