Many employers rightly proclaim that their employees are their most valuable assets. If this holds true for your organization, it stands to reason that paying those employees consistently and accurately is among the most important things you must do.
Unfortunately, payroll errors plague many employers. Among the biggest dangers of inaccurate payroll administration is that your organization may fall out of compliance with its payroll tax obligations.
Failure to properly withhold or deposit
As you’re no doubt aware, employers are obligated to properly withhold income tax, Social Security and Medicare contributions from employees’ pay, as well as match the Social Security and Medicare contributions.
Setup errors involving Form W-4, “Employee’s Withholding Certificate,” may occur that compromise this process. Residential address change mistakes and visa status changes can adversely affect withholding as well.
Perhaps the most dangerous mistake is failing to timely deposit withheld income taxes, Social Security and Medicare contributions, and employer matching amounts. IRS penalties accrue quickly because they increase as time goes by. That is:
- If a deposit is one to five calendar days late, the penalty is 2% of the unpaid deposit,
- If a deposit is six to 15 calendar days late, the penalty is 5% of the unpaid deposit, and
- If a deposit is more than 15 calendar days late, the penalty is 10% of the unpaid deposit.
The penalty amount may be 15% if more than 10 calendar days elapse after the date of the first notice or letter from the IRS. Alternatively, a 15% penalty may apply on the day a notice or letter for immediate payment is received.
If the IRS can make the case that a failure to deposit payroll taxes was willful, a 100% penalty may apply. And such penalties can be levied personally against all responsible individuals in an organization.
Failure to include items in taxable income
Remember, salaries or wages aren’t always the only includable items in employees’ taxable incomes. Employers must also include the value of awards, bonuses and, as required in certain cases, fringe benefits.
Failing to withhold sufficient amounts from employees’ total reportable income can also result in noncompliance with IRS rules. In turn, this could lead to penalties for failing to properly withhold or deposit payroll taxes. What’s more, the employer could be subject to information return penalties for incorrect Forms W-2, “Wage and Tax Statement.”
A multifaceted threat
Make no mistake, payroll errors are expensive — not only because of IRS penalties but also because of the resources you must expend to correct them.
Perhaps worst of all, they hurt your employer brand. Many employees will put up with only a few mistakes, if any, before they jump ship to another job. Contact us for help identifying all your payroll costs and assistance catching costly errors.
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We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.
