Vampire Digit might not be too scary, but you know what is?
Making payroll mistakes. *gasp*
Payroll is a necessary and recurring task for all businesses with employees. So making mistakes can be detrimental for a lot of reasons:
Taxes. You can get loads of fees piled on if you report your payroll taxes incorrectly. Even though the IRS (or CRA) might let it slide the first time, the last thing you need is to waste your money on expenses that could've been avoided.
Disgruntled employees. Payroll primarily has to do with people's paychecks. And messing with people's paychecks can start an angry mob. Yikes.
Wasted time. Mistakes cost a lot of time to fix. Time that you could've spent on doing something far more important.
This Halloween season, don't let payroll be the cause of your nightmares. Year-end is just around the corner (spooky!), so we've outlined 3 common payroll mistakes so you can prevent them like a pro.
1. Classifying your employees and contractors incorrectly
Believe it or not, there's a pretty big difference between employees and contractors. And getting them mixed up has a hefty price tag.
The biggest difference is the amount of taxes you'll pay and withhold. When hiring a contractor, you don't have to withhold their provincial/state and federal taxes as their employer (because they are expected to pay those taxes themselves as a self-employed individual).
That seems like a huge perk, and it is - that's less hassle for you to handle, and you can focus on the fine print in the contract instead.
But don't be fooled.
If you accidentally classify an employee as a contractor, you're in for some issues. Not only do you now have to pay back taxes to make up for your mistakes, but you also have to dish out things like overtime (when applicable), worker's compensation (in the case of injury), and a slew of other penalties and interest.
Not fun, and ultimately, not necessary!
So, instead of waiting to be hit with fees to know you classified incorrectly, take the time to make sure whether your newest hire is an employee or a contractor. Here's a guide for Canada and a guide for the US.
Related Content: Employees vs. Contractors - The Right First Hire
2. Missing records for terminated employees
Employees quit (or get fired from) jobs for a variety of reasons.
But no matter the reason for their departure, it's your duty as an employer to provide their tax documents (and in Canada, also their ROE) for their year-end filing.
Even though the employee isn't your responsibility anymore, their tax and employment history with you still is.
So if you terminate an employee early in the fiscal year, you can't forget about them when tax time rolls around!
If you have a payroll software like Wagepoint, those documents will already be saved and handled for you. But if you're running the show by hand, at least make a note to yourself that the ex-employee still needs to be included when you're gathering your W-2s or T-4s.
And in Canada, things get a little trickier still with ROEs (Record of Employment). This is a required document containing all employer information so a person can qualify for employment insurance.
Whether the terminated employee wants to file an insurance claim or not, it's still required that you provide them the information about their earnings, work hours, and other work history details when they move on from your company.
And if you're a non-Canadian employer operating in Canada, this applies to you too!
3. Using incorrect tax rates
As tax laws change, so do tax rates.
And if you're doing payroll yourself, that means you have to pay close attention or risk withholding the incorrect amount of tax from your employees.
That's right - provincial/state and federal tax rates may have changed, even since the last quarter. Though changes usually happen at the beginning of the year, mid-year changes have happened before.
And if you're not keeping up, under-withholding can cost you a lot in back taxes and late fees for every. single. employee.
Talk about scary.
Your best bet is to continuously check your country and state's rates through the federal system when it's time to file quarterly. Most of the time rate changes will be publicized, but it's always best to stay informed. Here's a resource for the US and one for Canada.
But for most of us, trying to sort through tax rates yourself is really confusing. So, if you would rather automate the process we don't blame you.
Might as well avoid the chance of getting it wrong, right?
Instead of constantly checking tax rates yourself, you can utilize your financial/payroll software to keep track of it as well (and not to toot our own horn here, but Wagepoint automatically adjusts tax rates for each payroll if they change!).
That way, you don't have to spend time analyzing all the rate information every quarter and you'll completely avoid any incorrect calculations.
If you've already accidentally paid the wrong tax rates, don't worry too much. You still have a few options to reconcile the balance before year-end.
Scare off payroll issues this holiday season
There's enough about running a business to be scared of. Don't make payroll mistakes be one of them.
With a few simple solutions, you'll breeze through year-end like a bookkeeping wizard.
The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.