Do you count gift cards given to employees as cash payments? Have a system for easy reimbursement for taxes when an employee is overpaid? Treat vendor payments as payroll before you receive a Form W-9? If you don't, you could be looking at serious fines from the IRS. Avoid these 10 common payroll and bookkeeping mistakes that small business owners tend to make.
1. Failure to Issue Form 1099 Correctly
Form 1099 should be issued to independent contractors and vendors who provide your business with over $600 in services. Failing to do so could lead to steep penalties.
2. Classifying Employees as Independent Contractors
Your workers are generally either independent contractors or employees. Choosing the correct classification is crucial. Different forms are involved (1099 versus W-2), and some workers may be subject to tax withholding.
3. Neglecting Backup Withholding for Vendor Payments
If a company pays a vendor before obtaining Form W-9 (Request for Taxpayer Identification Number and Certification), it could be subject to a payment of 28 percent for backup withholding.
4. Excluding Reimbursements for Expenses from Reportable Wages Incorrectly
The correct exclusion of reimbursements for expenses depends upon an accountable plan where expenses are reimbursed only if there is a business connection; other reimbursements must be included in taxable wages.
5.Trying to Go It Alone
Small business owners who try to deal with payroll matters on their own tend to experience more stress and may make costly errors.
6. Not Depositing Withheld Taxes in a Timely Manner
Withheld taxes should be deposited on a semi-weekly or monthly basis; however, some amounts require a deposit on the next business day. Failing to deposit correctly can lead to late deposit fees, penalties and interest charges ranging from two to 15 percent.
7. Not Including Non-qualified Deferred Compensation for Executive Income
Executive compensation may be subject to an excise tax. There is a relief program if this is neglected, but only certain oversights are eligible.
8. Excluding Travel and Commuting from Employee Income
In many cases, commuting and travel expenses are not considered taxable income for an employee. However, unique cases, like travel expenses for short-term assignments that lengthen, can be subject to income tax.
9. Not Including the Fair Market Value of Prizes, Gift Cards and Awards in Employee Income Totals
Most awards are considered taxable fringe benefits. Gift cards are considered cash and should be included within taxable wages.
10. Not Including Appropriate Fringe Benefit Value
Taxable fringe benefits can include company cars, country club dues, spousal travel and housing benefits. It can be difficult to calculate fringe benefit value correctly, due to a variety of valuation methods.
Don’t fall victim to unnecessary payments and penalties from the IRS. Partner with a professional bookkeeping service to handle your business payroll tax concerns and reporting.