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The most common tax and payroll errors businesses make, numbers 6-9

Posted by Carol Mahamedi

March 25, 2022    |     3-minute read (560 words)

The IRS estimates that 40% of small to medium-sized businesses face penalties due to payroll errors. Nevertheless, small business owners spend a ridiculous amount of time on payroll and tax compliance management. 

In this blog, which is part two of a series — click here for part one — we’ll wrap up our list of the most common payroll errors, their consequences and how you can avoid them.

6. Depositing employment taxes incorrectly or late

Every business with employees must deposit taxes withheld from employees’ pay, along with the employer’s share of those taxes, via electronic transfer by specific deadlines. Failing to deposit taxes correctly or on time may cause the business owner to be fined by the IRS. 

The IRS determines these penalties by multiplying the amount of the unpaid tax by a percentage rate based on how many days late the payment was submitted. For payments 1-5 days late it’s 2%; for payments 6-15 days late it’s 5% and for payments 16 or more days late it’s 10%.

7. Ignoring or not complying with wage garnishment orders

An estimated 7% of U.S. workers have their wages garnished annually, per ADP Research Institute. Wage garnishment can stem from many types of debt, like unpaid federal and state taxes, alimony, child support, student loans and medical bills. 

Upon receiving a garnishment order, usually from a court or government agency, the employer is responsible for calculating the garnishment amount, withholding it during the payroll process and forwarding payments to the proper agency or creditor. The garnishment can’t stop until the employer receives a release. 

While court-ordered garnishments are sometimes unclear or confusing, they must never be ignored. If you have questions about how to comply, the best practice is to contact a CPA who will be familiar not just with federal rules but the rules in your particular state.

Under state and federal wage garnishment laws, creditors have the right to seek recompense from the person’s employer if the employee fails to make their payments. In many states, the employer is liable for as much as the full amount of the debtor’s outstanding debt.

8. Not providing pay stubs as required

While there is no federal law requiring employers to provide pay stubs to employees, the majority of states have their own pay stub laws requiring employers to furnish regular statements in regard to pay and withholding. 

These laws address how pay stubs must be provided, meaning whether paper or electronic; what information must be provided on the pay stub; whether employees can opt-in or opt-out of electronic delivery; and penalties for employers that don’t comply.

To ensure your business is compliant with applicable regulations, check the website of the department of labor for your state.

9. Not complying with employment tax, labor laws

All employers are expected to stay compliant with employment tax laws including federal income tax withholdings, Medicare and Social Security taxes and federal unemployment taxes.  This entails staying abreast of rules that are constantly evolving. 

Employers must also comply with their state’s labor laws, in regard to matters such as equal pay, paid family and sick leave and exempt salary thresholds, and these laws also tend to regularly change. 

While complying with continually changing rules and regulations can be intimidating, the alternative could lead to penalties being assessed.

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