Two Common Payroll Tax Mistakes

While most individuals only worry about taxes once a year, businesses have to keep track of payroll taxes all year round. Some use payroll tax software, some outsource the task to business payroll services, while others have one employee or accountant who tries to do it all. If you own or work for a small business, payroll taxes can be a gigantic headache because an honest mistake can trigger an audit from the Internal Revenue Service (IRS). Here are two very common mistakes and how to avoid them so that the taxman doesn't come knocking on your door.

One common mistake is the misclassification of employees. Many companies use independent contractors who don't actually qualify as an employee under current tax codes. Businesses do not have to submit payroll taxes for these individuals. Some businesses may accidentally classify an actual employee who works directly for the company as an independent contractor. If this easy-to-make mistake is caught by the IRS, it could cost a business thousands of dollars in interest and penalties. If you use payroll tax software, be sure to classify each employee properly in the program to avoid this potentially costly error.

Some companies outsource work to independent contractors as a way to save money. If you currently send work to freelancers but wish to hire them as employees, there is a way to change their classification while still saving money. The IRS has a program called the Voluntary Classification Settlement Program. If you apply for and are accepted into the program, make sure to update your payroll tax software with the most current information about each employee as their classification changes.

Another common error regarding payroll taxes is failing to keep up with changing tax laws. It is not easy for one employee or accountant to keep up with all the laws, which is why payroll tax software comes in handy. A good program is updated automatically as the laws change so that you always have access to pertinent accounting information. Depending on the size of your company and the amount of employees, business payroll services may be another avenue to explore. Allowing an independent accountant or service to handle payroll taxes means you won't make filing mistakes or miss important deadlines, which can happen often due to changing tax laws.

When it comes to running a business, every season is tax season because of payroll taxes. To avoid making common mistakes, consider using payroll tax software. Payroll taxes are an unavoidable part of having a business, so it is best to invest in payroll tax software to simplify the process and free up your time and capital to focus on business growth rather than paying costly penalties to the IRS.

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