We’ve all been there before—you set out to prepare payroll for your small business, and mistakes happen along the way. That can be costly in more ways than one, since not only do you have to pay taxes on an employee’s salary, but if you fail to do so on time, you could be looking at penalties from the IRS that could total thousands of dollars.
This guide will show you how to avoid some of the most common payroll mistakes to ensure your employees get paid when they should and ensure you don’t get in trouble with the IRS.
1) Know Who Pays What
The first step in avoiding a mistake is knowing what a small business’s payroll is. What your payroll looks like depends on what kind of company you run and how many employees you have. For example, if your company is an LLC, it pays taxes at an individual level and comprises its owners (who are called members). Each member has an equal right to use profits and losses to their ownership interest in LLCs. One member can’t demand that another member be taxed for their income even if they didn’t receive any payment from their company—that person wouldn’t get a share of profits and losses. An LLC typically pays all its employees through one W2 form.
2) Don’t Forget to File Taxes
As a small business owner, you’re responsible for your taxes and payroll. So you must pay attention and stay organized throughout tax season. And most importantly, don’t forget about payroll—your most significant bill each month. If you fail or don’t file at all, there could be substantial consequences—from colossal tax bills to penalties and interest. And if employees do not receive payment on time, they could pursue litigation. For a small business owner juggling dozens of things at once, having a plan to keep finances under control through company growth is critical.
3) Manage Cash Flow Properly
One of your primary responsibilities as a business owner is ensuring you keep careful and accurate records. Without them, it’s impossible to effectively plan for your future (i.e., expenses and income), maintain compliance with tax laws, run payroll and handle any audits that might come down. For many entrepreneurs, setting up an office and staying organized is easier said than done. Get on top of what you need to do with these tips.
4) Keep Track of Time Cards
Whenever you hire a new employee, record their name, social security number, and salary. Store these records in a filing cabinet, and be sure to keep them locked at all times. You can use payroll software like UZIO (both of which offer free trials) for calculating and categorizing employee payroll and taxes so that they’re ready when you have to file your taxes each year. Not only will keeping accurate records avoid mistakes with payroll or tax payments, but it will also ensure that employees receive payment on time. In addition, good records can help with employee recruitment—if an employee leaves unexpectedly, having a comprehensive set of documents makes finding a replacement much easier! Suitable paperwork is essential for every small business.
5) Keep Accurate Records
Your business is likely to operate on a variety of payrolls throughout your career—from managing employee timesheets on an hourly basis to saving time with automating systems or if you hire staff members. Whatever method you choose, remember that you need clear records of what has happened. If an employee claims they worked their 40 hours last week, but their timesheet says otherwise, it’s essential that your system makes it easy for you both to see the process. Miscommunication happens when jobs change hands. Accurate record-keeping mitigates issues and ensures payment on time.