Top 5 Payroll Mistakes to Avoid

The ramifications of payroll mistakes emanate from external and internal sources. Externally, the government can levy fines and penalties for payroll noncompliance. Internally, employees tend to become seriously concerned when an error shows up on their paycheck. There are many possible reasons for these mistakes, but the following five are the most common.

1. Timekeeping Errors

A manual timekeeping system means that employee hours are recorded and computed by hand, increasing the chances of mistakes. Although a computerized or web-based timekeeping system can reduce mistakes, manual adjustments are still necessary at times with these systems—such as when employees take vacation, personal, or sick time. One wrong entry can snowball into an incorrect paycheck.

How to avoid the problem: Double-check employees’ hours and wages before distributing paychecks.

2. Improper Withholding

The complexity of payroll withholding makes the process highly susceptible to mistakes, which may stem from the following:

  • Inaccurately setting up employees’ W-4 and state tax information
  • Incorrectly withholding federal and state taxes
  • Erroneously calculating deductions for employee benefits
  • Improperly handling wage garnishments

How to avoid the problem: Use a payroll system that simplifies payroll processing, including withholding, to minimize data entry errors.

3. Misclassifying Employees

Employers who intentionally misclassify employees as independent contractors often do so to avoid paying their share of payroll taxes. Employee misclassification also may be a tactic to escape providing certain benefits, such as health insurance and unemployment.

The Internal Revenue Service (IRS) and Department of Labor take this issue seriously and may impose fines and penalties, including imprisonment, on employers who misclassify employees as independent contractors. The severity of the penalty depends on whether the misclassification was intentional.

How to avoid the problem: Follow all federal and state laws, including IRS guidelines, pertaining to classifying employees and independent contractors.

4. Incorrect Payroll Tax Reporting

Employers must report the taxes they withhold from employees’ wages plus their own share of taxes to the IRS and the respective state revenue agency. With so many reports to file at different times, it can be easy to miss deadlines or submit incorrect information.

How to avoid the problem: Hire a qualified onsite staff to handle payroll tax reporting or outsource it to a competent payroll service provider.

5. Violating Minimum Wage and Overtime Rules

The Department of Labor (DOL) says that it collected over $270 million in back wages for more than 240,000 workers in 2017. Claims for back wages are typically linked to violations of the Fair Labor Standards Act (FLSA), which establishes federal minimum wage and overtime laws.

A clear violation of the FLSA would be paying a nonexempt, hourly employee less than the required federal minimum wage or inaccurately classifying a nonexempt employee as exempt.

How to avoid the problem: Comply with the FLSA’s minimum wage and overtime requirements and be sure to consult state law, which may vary from the FLSA.

Honorable Mention: Inadequate Payroll Recordkeeping

Maintaining proper payroll records is essential to minimizing exposure to audits by the DOL, state labor department, IRS, and state revenue agency.

To ensure you avoid these and other common payroll mistakes, contact us today

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Know the Rules on Classifying Employees

The Fair Labor Standards Act (FLSA) sets guidelines for whether an employee is exempt or nonexempt under federal law. Exempt means that the employee is excluded from the Act’s overtime pay provisions and therefore does not have to be paid overtime for work hours exceeding 40 hours in a week. Nonexempt means that the employee is covered by the Act’s overtime pay provisions and must receive overtime pay for any hours worked over 40 in a week.

Federal Basis for Exemption

To qualify for exemption from overtime, the employee must perform specific duties equivalent to his or her position, as defined by the FLSA. In other words, exemption is based on job duties, not on job titles. For many jobs, exemption also depends on how much the employee is paid and how that payment is made.

  • Executive, administrative, and professional employees are exempt not only from overtime pay but also from receiving minimum wage, provided they meet the FLSA’s duties and earnings tests. In addition to passing the duties test, these so-called white-collar employees must receive at least $455 per week to qualify for the exemption.
  • Executive employees must be paid on a salary basis.
  • Administrative and professional employees may be paid on a salary or fee basis.
  • Certain computer professionals are exempt from minimum wage and overtime if they pass the duties test plus and also receive a salary or fee of at least $455 per week or a minimum hourly rate of $27.63.
  • Outside sales employees are exempt from minimum wage and overtime pay if they satisfy the duties test, which includes making sales and frequently working away from the employer’s place of business. Outside salespeople do not have to undergo an earnings test.
  • Some positions are exempt from only overtime, rather than both minimum wage and overtime. These jobs include those performed by airline employees, motion picture theater workers, and railroad employees.

A Simple Rule for Nonexemption

If an employee does not meet the qualifications for exempt status, then he or she is nonexempt. In addition to qualifying for overtime, nonexempt employees must receive no less than the federal or state minimum wage, whichever is higher. Blue-collar, clerical, construction, and semiskilled employees are typical examples of nonexempt workers.

A Trap to Avoid

Most salaried employees are exempt and most hourly employees are nonexempt. This general standard, however, should not be used as the definitive guidepost for determining exempt or nonexempt status. Employees can be salaried yet nonexempt, such as those who do not perform the duties required for exempt status despite meeting the minimum salary requirement—in which case, they are eligible for overtime. Similarly, employees can be hourly yet exempt, such as those who perform the FLSA-required duties for their role but are compensated on an hourly basis, as allowed by the FLSA.

An Eye on State Law

The state may have laws on overtime pay and exemption that differ from the FLSA. For instance, California has established job duties tests for executive, administrative, professional, and computer employees as well as tests for inside and outside salespeople. California also has its own minimum salary and overtime pay requirements. Be sure to check both federal law and your state’s rules on wages and overtime.

Contact us today for more assistance with correctly classifying your employees.

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Terminating Employees the Right Way

The process of terminating an employee should not be taken lightly, as improper handling can lead to unpleasant results, such as the employee suing the company. It’s therefore vital that you follow the law when firing or laying off an employee.

“At-Will” Employment

Employment is “at will” in most states—meaning, either the employer or the employee can end the employment relationship at any time, for any reason. The employer, however, cannot fire the employee for an illegal reason.

Unlawful Reasons to Fire an Employee

The following reasons constitute unlawful terminations:

  • Discrimination. Federal antidiscrimination laws protect employees from being fired because of their race, national origin, gender, religion, genetic information, disability, or age (if the employee is over 40 years old). Federal law also prohibits most employers from firing an employee because of pregnancy or a medical condition linked to pregnancy or childbirth. Many states have their own antidiscrimination laws, which, in some cases, provide broader protections for employees than federal law.
  • Retaliation. An employee cannot be fired for engaging in certain protected activities, such as reporting his or her employer’s illegal activity to a federal or state agency. The employee also cannot be fired for filing a discrimination claim against his or her employer.
  • OSHA Complaints. It is unlawful to fire employees for reporting noncompliant work conditions to the federal Occupational Safety and Health Act agency.
  • Alien Status. Employers cannot use an employee’s alien status as the basis for the firing—provided the employee has the legal right to work in the Unite States.
  • Other Reasons. Employers generally cannot fire an employee for refusing to take a lie detector test, and in many states, it is unlawful to fire an employee for reasons that are morally or ethically wrong to most people, such an employee’s refusal to commit an illegal act for the employer.

Layoffs

According to the Worker Adjustment and Retraining Notification (WARN) Act, applicable employers must provide at least 60 days’ written notice in cases of mass layoffs or plant closings affecting 50 or more employees at a single worksite.

Employment Contracts

Will the termination violate an employment contract? That’s the pivotal question here. Regardless of whether the contract is oral or written, make sure the termination will not result in you breaching the agreement.

Final Paychecks

As a general rule, employers cannot withhold an employee’s final pay. Most states have final paycheck laws that determine when terminated workers should be paid. In some cases, the timeframe depends on the employee’s industry and whether he or she was fired or laid off.

State law may dictate whether unused vacation or paid time off should be paid upon termination, the method for disbursing final wages, and the types of deductions that can be made from the last paycheck. Other potential areas of examination include employment contracts and company policies that address final or postemployment wages.

Employment termination is a sensitive process that can have long-lasting effects on both the employee and the organization. Therefore, you may need legal counsel along the way. Call us today for additional guidance on proper terminations.

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Understanding Your Payroll Tax Liabilities

On the federal level, employer-only taxes include Social Security tax, Medicare tax, and federal unemployment (or FUTA) tax, which are administered by the Internal Revenue Service (IRS). On the state level, employers are on the hook for state unemployment (or SUTA) tax, which is administered by the state workforce agency.

Although these employer payroll taxes may be commonly known, others, such as employment training tax and transit payroll tax, are less prevalent because they are based on location. Let’s take a closer look at what employers may be responsible for when it comes to their portion of payroll taxes.

Social Security and Medicare Taxes

Both employers and employees are subject to Social Security and Medicare taxes. For 2018, employers and employees pay Social Security tax at 6.2 percent, up to the annual wage limit of $128,400. They also pay Medicare tax at 1.45 percent, on all wages.

Employers remit their portion of Social Security and Medicare taxes plus their employees’ Social Security tax, Medicare tax, and federal income tax withholdings, together, to the IRS, either monthly or semiweekly. Most employers file quarterly wage and tax reports with the IRS on Form 941.

You might be allowed to file your reports annually, on Form 944, if your total tax liabilities equal $1,000 or less for the year. Total tax liabilities include your share of Social Security and Medicare taxes plus your employees’ federal withholdings.

Federal Unemployment Tax

Generally, employers are liable for FUTA tax if they paid $1,500 or more in wages for the calendar year. For 2018, employers pay FUTA tax at 6 percent on the first $7,000 paid to each employee. But, if you meet the requirements, you can take a maximum credit of 5.4 percent against your FUTA tax, which reduces your FUTA rate to 0.6 percent.

Employers typically must remit FUTA tax to the IRS by the final day of the first month that comes after the end of the quarter, plus file annual reports on Form 940 by January 31.

State Unemployment Tax

Employers pay SUTA tax on wages paid to each employee, up to the annual wage limit, at the rate determined by the state workforce agency. SUTA tax rates usually are based on whether the employer is new or experienced and on the employer’s industry. Most employers must file quarterly wage and tax reports with the state workforce agency. But, exceptions may exist. For example, domestic employers often are required to file annual, not quarterly, reports.

Other Employer Payroll Taxes

Although many employers are liable only for Social Security tax, Medicare tax, FUTA tax, and SUTA tax, others aren’t so lucky. Employers in California also must pay and report employment training tax—at 0.1 percent on the first $7,000 paid to each employee, for 2018—to the state’s Employment Development Department. Certain districts in Oregon require employers to pay and report transit payroll tax to the Oregon Department of Revenue.

When in doubt, contact the state revenue agency to determine which state or local payroll taxes are relevant to your business. For guidance on these and other payroll matters, contact us today.

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Tips to Improve Company Morale

Company morale can build or break a firm’s success. Here are some tactics to think about adopting for your business:

  1. Help employees feel that their work is more than just a job. One’s purpose can easily get lost in the day-to-day grind. Everyone wants to feel that his or her work has a higher purpose.
  2. Creatively celebrate accomplishments. Take time to reflect on how much has been achieved. This helps employees appreciate how much they have done.
  3. Grant time off to workers to pursue projects they’re passionate about. Personal projects can provide an energizing break from regular responsibilities, serve as a source of innovation and maybe even spark new products or services for your company.
  4. Mix up your firm’s usual way of doing things. Depart from customary routine — for instance, stage an indoor golf tournament. Shake things up so employees get out of the meetings-and-cubicle-life grind.
  5. Don’t forget to have fun. Play a monthly game — anything from Trivial Pursuit to Wii bowling matches could be fun. Consider offering fun rewards when staffers achieve certain goals — such as play days at local amusement parks. Team-building events can include a scavenger hunt.
  6. Train employees to develop positive attitudes. Use videos with inspiring themes.
  7. Offer time away from the office to do some good — Build camaraderie through community service. Give employees paid hours to volunteer for a charitable initiative or organization. Departments can take on volunteer projects as a group.

Remember your original goals for the company

Is your company living up to the standard you originally set for it? If not, push for change. These tips definitely can help:

  • Encourage innovation — Employees just might actually have valuable input.
  • Explore noncash rewards — Employees are rewarded for hard work and can physically experience it in the form of a concert or trip. They’ll return to the workplace rejuvenated.
  • Circle back after big projects — Pass on feedback before the next task is started. Let people voice any concerns about the outcome. Be collaborative — ask for one thing that worked and one thing that can be improved upon.
  • Treat people like people — Put yourself in your staffers’ shoes. How might you respond to the feedback you’re giving?
  • Showcase their trophies — Make workers’ achievements visible. Stand up for the team.
  • Invest in training — Get employees out of their ruts and let them take advantage of learning events.
  • Be transparent with promotions — Let people know what opportunities are available to advance their careers. Let workers know what’s needed to level up.
  • Be stingy with meeting time — Discuss the topic of wasting time in meetings companywide. Talk about how detrimental meetings can be when they get out of control.
  • Shuffle roles — Let employees jump from one department to another — encourage coworkers to educate one another on what’s required in their role.
  • Redefine the work week — Initiate half-day Fridays or a four-day workweek. Ask employees whether they’re happy with the five-day week. Let employees know that you care.
  • Be the best example — Say what you mean and do what you say.

Concrete experiences can lead to change in the office and can boost morale.

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Get a Handle on Internal Payroll Controls

Because payroll involves sensitive data, including employees’ Social Security numbers and direct deposit details, employers must take measures to protect this information against payroll fraud. In a 2017 report by Hiscox Inc., payroll fraud was listed as one of the most common types of embezzlement suffered by U.S. companies. The report also stated that employee theft cost these companies $1.13 million in 2016.

No matter your business size, it’s important to establish robust internal controls that not only safeguard against payroll fraud but also allow you to meet the fundamental objectives of payroll, such as paying employees accurately and on time. Following are some suggestions.

Ensure Separation of Duties and Provide Oversight

Separation of duties means assigning different payroll duties to different individuals to minimize the risk of payroll fraud. For example, separation of duties makes it harder for payroll employees to engage in “ghost employee” fraud, such as setting up fake payroll accounts or fraudulently paying employees who no longer work for the company.

Large businesses usually have a more sophisticated separation of duties structure than small businesses. In a large business, you may find multiple payroll specialists and payroll supervisors plus a payroll director or payroll manager. Payroll system access is given to each of these employees based on their job duties, with the payroll director or payroll manager having the highest level of access.

A small business may have only one payroll employee, who’s responsible for reviewing timecards, making timecard edits, and processing and distributing paychecks. Your lone payroll employee should be closely supervised to ensure that payroll funds are appropriately distributed. Also, he or she should not be unilaterally responsible for issuing stop payments and manual checks.

Establish General Internal Controls

In addition to separating payroll duties, general internal controls can help your business establish important safeguards. Your business should do the following:

  • Hire a qualified onsite employee to act as a liaison, if you outsource payroll to a service provider. The liaison double-checks the service provider’s work and performs the necessary oversight while serving as a go-between between the employer and the service provider.
  • Have your payroll employees sign a confidentiality agreement that forbids them from disclosing payroll-related information to unauthorized individuals.
  • Maintain physical payroll records in a secure storage space that is accessible only to authorized personnel.
  • Restrict payroll activities to a private area. Payroll should not be processed in the open, such as from a cubicle that makes it easy for nonpayroll employees to see the payroll processor’s computer screen.
  • Require that payroll change authorizations—such as changes to employees’ withholding allowances, direct deposit, and pay rates—are made in writing. With written authorizations, you have a paper trail for the requests.
  • Reconcile payroll at the end of each pay period to ensure employees’ paychecks and your financial reports are accurate.
  • Perform internal payroll audits at least once or twice per year. Periodic audits can help you detect compliance issues and internal payroll problems.
  • Document your internal payroll controls and train your payroll staff on how to use them.

Whatever the size of your business, if you need help establishing internal controls and safeguarding against fraud, contact our specialists today.

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FSAs: The Missing Piece of the Benefits Puzzle

Millions of workers have access to flexible spending accounts (FSAs) — tax-saving vehicles that let your employees set money from paychecks aside on a pretax basis to cover anticipated health care or dependent care expenses.

The Tax Cuts and Jobs Act that overhauls the tax code makes no changes to the tax treatment of health dependent care FSAs. The key change for FSAs in 2018 affects those who use them for health care costs: The annual limit is tied to the inflation rate, and price increases over the past year will lift the contribution limit over 2017 by $50 to a total of $2,650. The limits for dependent care FSAs are holding steady at $5,000 for single-tax filers and married couples filing jointly, and $2,500 for married couples filing separately.

No health insurance policy covers everything, and that’s where FSAs come in. They are reserved to pay for your workers’ out-of-pocket health care costs — and what’s special is the workers don’t have to pay taxes on the money put into the account.

Used correctly, FSAs can produce huge tax savings. Yet a surprising number of employees don’t take advantage of FSAs. One reason: They typically work on a use-it-or-lose-it basis.

Employees contribute a specific amount to their accounts, rack up eligible expenses and then get reimbursed or get the amount debited from a prepaid account.

The amount committed during enrollment is the amount they have to work with during their plan year. Employees can’t change their minds later to add more or reduce the contribution. The only exceptions are for qualifying life events, such as getting married or divorced, or having a child.

Health care FSAs are used to pay for expenses on medications, doctor’s office visits and medical equipment such as blood sugar monitors. Over-the-counter medications also are eligible for FSA reimbursement, but they need a prescription to qualify.

Dependent care FSAs are used to pay for such child care expenses as day care, preschool or summer camp.

You as an employer can help make FSAs more attractive: FSA rules have evolved to protect employees from large losses. You can allow workers to preserve unused FSA funds or give participants more flexibility via one of the following options:

  • A $500 carryover, which allows participants to roll that much money into the upcoming plan year without that sum counting toward the total contribution.
  • A two-and-a-half-month grace period — until March 15 of the following year — which allows participants to incur eligible expenses for roughly another 10 weeks once the plan year comes to a close.

Employers do not have to offer either option, and they are not allowed to offer both.

If you offer one of the protections above, your employees will see FSAs as offering less risk. FSAs can benefit every employee — individuals, families and soon-to-be retirees. By setting aside pretax dollars, your workers pay fewer taxes and increase their take-home pay.

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