payroll mistakes

4 Common Payroll Mistakes That Create a Tax Liability for Your Small Business

By Stanley Block

We live in the age of e-filing, e-mails, and Skype meetings. All the systemization has created a fast-paced workplace with information at our fingertips. But with all this automatization comes room for error, whether it’s human or program. So what happens when a mistake is made with a payroll company and you end up owing tax? Who is responsible? Most taxpayers want to point the finger at the payroll company, but the hard to swallow truth is the debt and headache gets passed on to the taxpayer.

Taxpayers, even though they are not CPAs, EAs or attorneys, are ultimately responsible to review and approve all financial and tax related documents. This is difficult because payroll and taxes are not things that come easy to most individuals.

Some common payroll mistakes that might generate a tax liability are: Misclassifying workers, neglecting to send appropriate documentation, poor record keeping, and miscommunication between the worker and payroll company.  

Let’s address these errors one by one.

Misclassifying Workers 

There are a lot of taxpayers with liabilities resulting from misclassification. Their employer said they would take taxes out and at the end of the year when they receive a 1099. The taxpayers are shocked that no taxes were taken out of their check during the year, and now they are left with a back tax bill they can’t afford. Yes, their employer led them astray with wrong information, but ultimately the taxpayer needs to look at their pay stubs. If your pay seems to be larger than you expected, ask questions. If you don’t see the taxes coming out, ask questions. The burden rests on your shoulders as the employee and taxpayer to make sure the appropriate taxes are being withheld.

Failing to Send Out Documents 

The second common mistake payroll companies make is failing to send out your documents all together. If you know you worked somewhere and you don’t receive the documents, call HR or call the payroll company. Failure to receive the documents does not mean that income was not reported to the IRS. If you do not include that income on your return, you could face audit or possibly criminal charges if they feel the underreporting was willful. When tax time comes, start putting all your documents together. Get organized and make sure you have everything you need to prepare the return. If you are missing information or feel you are not ready, request an extension. With that being said, if you think you might owe money for the tax year, try to pay the balance. Remember, an extension to file is not an extension to pay.

Miscommunication

This happens quite often. There’s a miscommunication between the worker and payroll company. Maybe you knew you were getting a small check and you call your payroll company and request to change your exemptions. Often times people get bad advice from coworkers telling them to claim exempt or increasing their exemptions. Don’t listen to this advice. Filing exempt without a good reason is never a good idea. You are shooting yourself in the foot for a few extra dollars in a paycheck. If you change your exemptions remember to contact your payroll company when finances improve and adjust accordingly.

Don’t forget to tell them the payroll company and have them put your W-4 withholdings back to 1 or 2 once finances improve. You must follow up and review your pay stubs to make sure your payroll company made the appropriate changes, you can’t just hope that one phone call completes this task. Follow it through until the end. Sometimes a simple phone call or letter is required to make sure the change is completed correctly.

Poor Record Keeping 

This payroll error includes poor record keeping, poor data entry, incompetent staff and bad handling methods. Manual inputting can result in mismatched identities such as names and social security numbers. When you receive your checks or documents from your company, please check your personal information. Make sure your social security number is correct, look over the withholdings, check your hours, and please do your due diligence to protect yourself from payroll companies errors.

There is always room for errors and miscommunication. Companies are growing in size and with new automation there is a huge margin for error. Things can slip through the cracks and before you know it you get a collection letter from the IRS or your state. Bottom line — educate yourself on business matters. If you see a problem speak up and protect yourself, or you may be one of the unfortunate taxpayers with a big back tax bill.

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Stanley Block
Stanley H. Block Esq. is a member of the Baltimore City Bar and Maryland Trial Lawyers Association. With more than 50 years experience, the Maryland-based lawyer specializes in IRS representation and tax problem resolution.

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