15760 Ventura Blvd, Suite 610 Encino, CA 91436
15760 Ventura Blvd, Suite 610 Encino, CA 91436
Personal, Affordable Payroll Services, Bookkeeping, and Tax Processing for Small Business throughout Los Angeles County.

Payroll Processing Mistakes Can Cost You Serious Cash

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Payroll is a complicated process. It requires a thorough knowledge of the tax system; which is changing constantly. Mistakes are costly when filing payroll taxes and have the potential to be harmful to small businesses. Here are four common payroll mistakes to be aware of:

  1. Classifying employees as independent contractors

Most of the time workers are classified under two categories, either independent contractors or employees. It is important that workers are classified correctly. Compensation is reported to the IRS differently depending on this classification; employees are W-2, independent contractors are 1099. Benefits like health insurance and retirement plans depend on a worker being under the employee classification. If an employee is improperly filed as an independent contractor, under the Voluntary Classification Settlement Program eligible employers can voluntarily reclassify that worker as an employee. However, they must pay 10 percent of the employment tax liability to get into compliance.

  1. Failure to issue Form 1099s

Any vendors and/or independent contractors who provides a business with over $600 in services usually must be issued a Form 1099. When a Form 1099 isn’t furnished in a timely fashion, the company at fault can be subject to penalties.

  1. Failure to subject vendor payments to backup withholding

Companies that issue payments to vendors must first obtain a Form W-9. If they fail to do so, any payment has the potential to be subject to a 28 percent mandatory backup withholding. If, for example, the vendor is determined to be a corporation, thereby not subject to backup withholding, there is still a potential issue if the issuing company didn’t obtain the Form W-9 before issuing payment. The IRS, on audit, can pursue the collection of a failure-to-deposit penalty on the amount that should have been withheld. This is due to the fact that the company was not aware that the vendor payment was exempt, at the time of payment, from backup withholding.

  1. Not including Fair Market Value of Prizes, Awards, and Gift Cards in Employee Income

When it comes to federal income tax, more often than not awards and prizes must be classified as taxable fringe benefits included in federal income and employment tax withholding. Gift cards are considered cash and they must be included in taxable wages.

These mistakes and others can be hard to catch. In order to stay worry free from facing penalties when filing payroll taxes, using a company like ATPP can make all of the difference. Call today so we can take care of all of your payroll needs!