3 Basic Payroll Mistakes that Could Impact Your Company in 2015

Managing payroll is a big problem for many companies. This is particularly true among those that don’t work closely with a payroll company and/or tax professional. The aftermath? Payroll tax penalties – “thanks” for not handling your payroll properly.

The IRS continues to keep an eye on the payroll practices of companies of all sizes, focusing on areas including: payroll taxes, fringe benefits and worker misclassification.


Knowing the basics helps – a lot. But knowing what mistakes made by other businesses is paramount.  The more you know about common mistakes, the easier it is to avoid trouble.

So, what mistakes should you avoid making at all costs? There are quite aplenty to mention, but here are three most “popular” payroll mistakes that have impacted many companies in the past:

1. Employee misclassification

Generally speaking, a worker is classified as an employee or an independent contractor. If you don’t designate the proper classification, it could lead to trouble with the IRS.

This webpage of the IRS website will help you understand the differences between the two. If you decide to hire someone as an independent contractor, keep in mind there are some key differences in the way you’re required to work with them.

2. Overlooking the importance of issuing 1099s

If a vendor or independent contractor is paid more than $600, you are required (most of the time) to issue Form 1099. Failing to do so could result in an IRS penalty.

Questions about whether you are required to issue a 1099 should be directed to a tax professional.

IRS Tax Form 1099
photo credit: Scott

3. Incorrectly setting up your payroll system

Believe it or not, many mistakes are directly related to the way your payroll system was initially setup. This has nothing to do with completing payroll on time or calculating wages. Instead, this is related to things such as failing to register your business, not withholding the appropriate amount of taxes, or improper classification of employees.

The above payroll mistakes may not sound like a big deal, but they could cost you. If you make a mistake, regardless if you do so on purpose or by accident, it could lead to many headaches as well as financial ramifications.

Remember that as the employer, you are responsible for federal, state and local payroll taxes, including Social Security and Medicare, as well as the Federal Unemployment Tax Act and State Unemployment Insurance. If you are considering a payroll service, make sure you review your payroll needs to find the best fit for your business.