For a small business owner, year-end tax preparations are just one more headache to add to the already-busy holiday season. When you're trying to do your own payroll, it can be even more difficult to keep track of all the documents to file, deadlines to meet and regulations to follow. But mistakes on your payroll, whether intentional or not, can really cost your business.
"There are many hard deadlines related to tax deposits and filings," said Phil Noftsinger, CPA and president of business services provider CBIZ Payroll. "All of these come with painful penalties for noncompliance, so employers doing payroll in-house should make sure they are very comfortable with all of the deadlines and reporting requirements for year-end."
"There can be hefty fines attached to incorrect filings, along with payroll audits," added Shelley Ng, vice president of product management at payroll and HR solution provider Ceridian.
Noftsinger and Ng outlined four common but costly errors small business owners should avoid as they wrap up their payroll for 2014. [Choosing a Payroll Service: A Buying Guide for Businesses]
Improperly handling taxable gifts and rewards. Taxable business expenses, such as company property and life insurance, are typically reported at the end of the year, but other items, such as reward trips and employee gifts, should be taxed more closely to the time they were received.
"Tangible items provided as holiday gifts, or even items provided related to contests [employees] may have won throughout the year, fall into this category," Noftsinger said. "[Also] tripping up many employers are the new 'points websites that allow employers to deposit points into an associate's account for him or her to spend through the website as they see fit. Once employees select an item for which to use their points, this becomes a taxable event and should appear on the associate's payroll stub."
Not researching legislative changes. Federal and state governments frequently change their tax legislation, rates and forms throughout the year, so it is critical that you understand these obligations, Ng said. She advised employers to research legislative changes and ensure that they've downloaded the latest versions of tax forms.
Ng noted that cloud- and Web-based payroll software are updated automatically through the service provider, but if you have local software installed, be sure that you have the latest version that reflects the legislative changes.
Missing ACA-related regulations. The rules regarding year-end reporting for health insurance have become more complex with the passage of the Affordable Care Act. Employee and employer portions of health insurance costs must now be reported on associates' W2 forms — a rule that Noftsinger said employers may miss.
Incorrect employee classifications and calculations. The IRS has been cracking down on employers that knowingly or accidentally misclassify employees as independent contract workers. Ng emphasized the importance of providing everyone on your payroll with the proper tax filing form for their classification, whether it's a W2 (employee) or 1099 (contractor/freelancer). Ng also noted that, for companies with out-of-state employees or multistate locations, employers need to be in compliance with state-specific filing rules and tax calculations.
"Set up your employees properly in their current state to ensure state taxes and unemployment insurance are properly calculated, and the appropriate tax form is generated for each employee," Ng said.
If you're considering outsourcing your payroll processing to an outside firm, Noftsinger advised finding a processor that you can trust.
"Hold them accountable to making sure your relationship is important enough to them to provide a quality service," Noftsinger told Business News Daily.
Most important, as you take your business into the new year, be sure to maintain good habits and keep up your records and files right from the start.
"Don't treat year-end as an event," Ng said. "If you have good payroll, housekeeping and reconciliation processes in place throughout the year, you will mitigate headaches at the end of the year."