The government is on a mission to shore up deficits and budget shortfalls. One way to accomplish that objective is to collect on under-withheld employment taxes. So here are 5 common payroll mistakes to avoid and keep the IRS and state authorities from knocking on your door.
1. Incorrectly Classifying Independent Contractors
Accidentally classifying an employee as an independent contractor or vice versa is a common mistake. How the worker is paid, whether he/she is eligible for benefits, and whether payroll taxes should be withheld all hinge on this important classification. The IRS website offers a guideline for making the proper determination as employee or independent contractor.
2. Omitting Gift Cards and Fringe Benefits from Compensation
For federal income tax purposes, most prizes and awards are considered taxable fringe benefits subject to federal income and employment tax withholding. Other taxable fringe benefits can include spousal travel, company-provided vehicles, and housing benefits. However, some items can be excluded if they are considered “de minimis.”
When it comes to gift cards, they are considered the equivalent to cash and should always be included in taxable wages, regardless of the amount. Here is more detail online.
3. Failing to Make Timely Payments or Deposits
In general, companies are required to deposit payroll taxes monthly or semi-weekly depending on the average amount of deposits. Failing to make timely deposits can results in significant penalties and interest. Here’s a resource to help you determine which deposit schedule applies to your company.
4. Not Displaying Wage Posters
Those old wage posters aren’t outdated artifacts of the industrial age or required only on the factory floor. The federal government requires that you prominently display this poster publicizing the federal minimum wage and overtime pay standards. Even if you run a small office, it must be placed where employees will see it as they come and go from work. The penalty for willfully violating this provision may be a fine of up to $10,000 and/or imprisonment for up to six months!
5. Neglecting to File Form 1099
Form 1099 must generally be reported to the IRS and issued to vendors, including independent contractors, for services provided in excess of $600 during the year. Failure to file by the deadline can result in penalties.
Download the Employer’s Tax Guide (Publication 15, Circular E) from the IRS website for details about important payroll tax deadlines, filing requirements, and penalties.
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