From Complete Payroll, Inc.:
Not making payroll tax deposits on time. In our experience this is the biggest, and most costly mistake a business owner can make. Unfortunately it's also one of the easiest mistakes to make. Rules are complicated, and can change over time. But business owners who wear multiple hats sometimes just forget. Even making a tax deposit a day or two late can cause large penalties to accrue.
Not completing the quarterly forms. Each and every quarter, businesses must file certain payroll tax reports. At a minimum there are reports for the IRS, Illinois Department of Revenue, and Illinois Department of Employment Security. If you have out-of-state employees, you will have other sets of tax forms to complete. Not completing the forms or filing them late will result in fines, penalties, and interest.
Misclassifying employees as independent contractors. This is an issue on which the IRS is increasingly focusing. The laws are not always clear to business owners and too frequently the owner uses the "advice of my friend" to make these complex decisions. More often than not, we see workers that should be classified as employees, but are being treated as independent contractors. See our article on this subject.
Inexperienced staff handling the payroll duties. In smaller companies, the office manager is responsible for preparing payroll checks, making tax deposits, and completing quarterly and year-end forms. Sometimes this individual is not properly trained in the various laws that must be followed. Other times this person leaves, or is out for short or long-term illnesses. Who handles the duties then? This is an area that can cause significant disruption and costs.
Errors in completing year-end tax forms. In addition to wrong addresses and wrong social security numbers, calculations made on the year-end W-2's can cause IRS notices. The IRS will compare totals on the quarterly IRS forms to the year-end W-2 and W-3. Errors in calculation will cause a notice to the employer which usually results in complicated revisions to one or more forms.
Not issuing 1099's. If you pay an individual over $600 in a calendar year, you are required by the IRS to issue a Form 1099 to this individual by January 31 of the following year. The IRS can and does penalize employers for failing to report these payments. In addition, if the employer gets audited and does not issue 1099's to its subcontractors, the IRS may disallow these deductions and cause large increases in tax, penalties and interest to the business.
Incorrectly handling deductions such as insurance deductions, HSA withholdings and 401(k) withholdings. There are specific ways to handle the reporting of these deductions. Some deductions such as HSA contributions have different ways of being reported (before-tax or after-tax) and incorrect reporting can result in W-2's that have incorrect information for your employee's personal income tax returns. Not only can an error result in the embarrassing need to issue corrected W-2's but the resulting cost and inconvenience can be high as well.
Using the wrong deposit frequency for federal and state tax payments. Depending on the size of your payroll, you may be required to make federal payroll tax deposits quarterly, monthly, or more frequently. These frequencies can change and sometimes this catches business owners off guard.
Over-paying on state and federal unemployment taxes. Unemployment taxes are paid on a formula based on only a certain amount of wages each year or quarter. We've seen some employers not understand the rules and overpay these taxes.
Improper reporting for S-Corporation shareholders. There are special reporting requirements for s-corporation shareholder/employees that may result in the elimination of certain deductions for s-corporation shareholders. The largest of these is the failure to properly include the value of medical insurance paid to s-corporation owners on the shareholder's W-2. Another area is the failure to include the value of company paid cars used personally.