Payroll Mistakes that Get Businesses in Trouble

There is a lot more to running a business than simply providing a service or selling a product. Even sole proprietors have a lot to worry about above and beyond what it is they do. Things get even more complicated when employees are added to the equation. At that point, the sole proprietor becomes an employer subject to certain payroll rules that, if not adhered to, can get the expanding business in a lot of trouble.

Small business payroll can be a complicated matter if you want it to be. However, between all of the free information found on the internet and a large volume of online payroll service providers, the complexities of payroll can be reduced to very simple principles virtually any business owner can understand.

Below is a list of common payroll mistakes that get businesses in trouble. If your business is making any of these mistakes, get the information you need to correct them. Better yet, utilize a small business online payroll service capable of helping you eliminate any and all errors.

Not Registering for an EIN

Sole proprietors can use their Social Security numbers for tax reporting purposes. But as soon as the small business adds employees, the Social Security number is no longer acceptable. Employers must have a federal employee identification number (EIN) for tax reporting purposes. Failure to obtain a number will lead to a great deal of trouble when it comes time to file tax reports at the end of the year.

Registering for an EIN is relatively simple. You can do so online or by calling the IRS directly. EIN numbers are issued instantly, so there is no waiting, and the entire process only takes minutes.

Not Obtaining State and Local IDs

Hand-in-hand with the federal EIN are state and local ID numbers. Every state and local community are different, so employers have to check with the right authorities to find out what is required. Failure to obtain the right state and local numbers can create just as many headaches as not getting a federal EIN.

Incorrectly Classifying Employees

One of the most common small business payroll mistakes is that of incorrectly classifying employees. In other words, there is a distinct legal difference between an independent contractor and employed worker. Independent contractors are self-employed business owners who work for their clients on a contract basis. Employed workers are on the company payroll and receive a combination of salary and benefits commensurate with the work they do.

It is critical to understand how the federal government distinguishes between contractors and employees. If you get it wrong, you could end up paying penalties in addition to back taxes. If you find the distinction too confusing, you are a prime candidate to use an online payroll service that takes care of all the little details for you.

Not Reporting Payroll Taxes

The costliest small business payroll mistake is a failure to report payroll taxes. The IRS offers an Employer’s Tax Guide that spells out the federal mandates for reporting; this guide does not address state and local reporting.

Contracting with a small business payroll service takes the headaches out of reporting payroll taxes. The payroll provider makes sure all taxes are withheld and that periodic payment and reporting requirements are met. In the absence of a payroll service provider, the small business has to have an experienced staff member capable of handling payroll tax reporting.

Small business payroll does not have to be complicated. But it does require at least a basic understanding of federal, state and local regulations. Online payroll services are invaluable in this regard.