Everyone makes mistakes, but some payroll tax mistakes can cost you big time. So, try to avoid them as much as possible.
1. Improperly Classifying Workers
When you hire employees, you have to pay payroll taxes on the employees’ wages and taxable benefits. Don’t try to get around paying those by classifying your employees as independent contractors.
The IRS and Department of Labor (DOL) have a pretty strict definition of who classifies as an independent contractor. If you claim a worker is an independent contractor, but they’re really an employee, you could be facing a very large tax bill:
You may be responsible for 40% of the employee share of Federal Insurance Contributions Act taxes (FICA) and 100% of the employer share. FICA taxes are Medicare and social security taxes withheld from an employee’s paycheck.
If you didn’t withhold income taxes, then you may be responsible for some of that, too (you might be responsible for 1.5% of total wages).
The IRS could also penalize you for failing to pay taxes. It could be 0.5% of all unpaid tax liability per month, up to 25% of your total tax liability owed.
If the IRS thinks that you purposely misclassified a worker, they can charge you even higher penalties. Plus, you might face criminal charges and jail time.
To avoid these penalties, be very careful before classifying someone as an independent contractor. For more information about who you can classify as an independent contractor, click here.
2. Reimbursing Travel & Other Expenses Under a Non-Accountable Plan
If you don’t have an IRS approved accountable plan, but reimburse your employees for travel and other expenses, your employees could face a larger than expected tax bill. If you don’t have an expense policy, or if it’s a non-accountable plan, then any expense reimbursement is taxable to the employee and subject to payroll taxes.
To avoid increasing your employees’ taxable wages, create an accountable plan. For more information about how to write an expense policy, click here.
When an employee leaves, they aren’t necessarily eligible for unemployment benefits. For example, if they left on their own or were fired for serious misconduct (like sexual harassment or theft), then they cannot collect unemployment. That won’t stop a former employee, however, from filing a claim anyway.
The forms must be submitted to your State Workforce Agency (SWA) no later than the 28th calendar day after the employee starts working for you. So, ask each employee to fill out the form as they’re filling out their other onboarding paperwork.
Each contributor on the Workful Editorial Team holds an advanced degree in business-related studies and/or communication and has written for other small business publications, including SmallBizDaily, HR.com, and Business.com. The information in this article is based on thorough research and has been edited for accuracy and timeliness by Workful’s Human Resources experts. While this blog is meant to inform and educate small business owners, it is not intended to provide legal, financial, accounting, or tax advice.