Filing taxes is one of the painful headaches that employers have to deal with every year. If you are a business owner, this pain further compounds since you must file these taxes four times a year. A Form 941 is used to file the taxes you withhold from your employees’ wages and salaries. This is usually done using software such as a 941 form online generator, or it can be mailed manually to your nearest tax office.
When you think about it, the process sounds pretty simple. You simply deduct the money and then give it to the IRS. Easy, right? However, did you know that at least 33% of small businesses find themselves in trouble with the taxman over mistakes made when filing their Form 941? This leads to penalties and fines they could easily have avoided if they paid a little bit more attention. Whether you are a new business and want to do everything right or an established firm that wants to minimize Form 941 errors, here are a few tips to help you stay on the good side of the taxman.
Tips for Error-Free Pay Stubs
There are many issues that can lead to a payroll error, from hiring an incompetent payroll officer to data entry mistakes and misfiling gross and net payroll. The minute your employees’ pay stubs are full of pay miscalculations, just know you are in for a hard time with the IRS.
The first step towards ensuring minimal issues with your employee’s wages and salaries is by hiring the right personnel to ensure your company complies with payroll laws and regulations.
Next, you have to ask yourself, how do we process our employees’ payments and create their pay stubs? Payroll software can quickly take away half the work by automating payments and making it easier to track your payroll ledger. From there, it’s just a matter of ensuring the data entry is done properly and that the pay details are reviewed periodically to ensure the recording was done properly.
Conducting payroll audits can also help you spot mistakes quickly before they compound into bigger issues that may be harder to solve or take longer and involve more resources.
Wrong Classification of Employees
Every company works with different types of employees, contractors, and freelancers. The advantage of working with independent contractors is that you are not required to file taxes on their behalf since they fall under the self-employment tax. However, if you have full-time employees on a salary, you will need to deduct payroll taxes on their salaries and any taxable benefits.
If the damage is done and you’ve already misclassified one or several of your employees, there’s still a chance to redeem yourself. The IRS allows you to reclassify your employees under the Voluntary Classification Settlement Program (VCSP) and saves you from having to pay all the taxes due. Instead, you’ll be required to pay only 10% of the employment taxes due within the latest tax year.
A lot of people think overtime pay is when an employee works more than 40 hours a week. However, this is far from the whole truth, and failing to pay your employees any overtime wages they are due opens your business to lawsuits since it goes against the Fair Labor Standards Act (FLSA).
An employee can be exempt or non-exempted from overtime pay. Hourly workers are non-exempt, and they must be paid for any extra time they put into your business. For instance, if someone works for more than 8 hours a day, they must be paid for the extra hours they worked that day regardless of whether the total hours for the week were more than 40.
Additionally, overtime also includes the time they work when they should be on break or even when they work overtime without prior approval. You should also not try to compensate them by asking them to work fewer hours to compensate for their overtime, as this violates the Fair Labor Standards Act.
For an employee to be considered exempt from overtime pay, they must meet the following conditions:
- The employee must earn a consistent salary that doesn’t change based on hours worked
- They should earn more than $23,600 annually or at least $455 weekly.
- Their position should be professional, like an engineer or a doctor, be administrative or managerial
It’s quite easy to slip up when doing the withholding process and forget to include certain deductions or fail to withhold the right amounts in others. Some of the common withholding errors you’ll find businesses making include the following:
- Failing to deduct withholding taxes from fringe benefits such as allowances, bonuses, and gift cards.
- Miscalculating pre-tax and post-tax deductions
- Failing to withhold the right federal and state taxes (Remember, these taxes change based on the state your business is in)
- Issuing the wrong tax forms to employees
- Deducting the wrong taxes is due because of classifying your employees wrongly.
You can avoid most of these errors by paying keener attention when processing payrolls and ensuring your business is compliant with the laws of the state where it was established.
Poor Record Keeping
Every state has its own laws on how long a business should keep its employees’ pay records. FLSA laws require you to have at least three years of your employees’ salaries and wages, and they should include details such as time schedules, additions and deductions, canceled checks, and W-2 tax forms.
Failure to keep these records properly can lead to lawsuits against your business or fines since you may find yourself unable to prove the tax filings you made were correct at the time of filing. Moreover, these pay records must be available when the Department of Labor sends its representatives to confirm that you adhere to the employee wages and compensation law.
Your record-keeping responsibilities include ensuring that your employees complete their W-2 forms correctly. Therefore, ensure you double-check the following details:
- Their full name and current address
- The date of birth
- The start and termination date of their employment
- Their social security number
- The payroll details are correct, including overtime and their hourly rates
A study conducted by the IRS revealed that the taxman penalizes at least one in every three businesses for different payroll mistakes, including missed deadlines. Imagine doing everything right and failing to submit your Form 941 on time!
This is a costly mistake that is easily avoidable. According to the FLSA and tax withholding laws, you are required to submit your Form 941 tax filings for every quarter within 30 days. Let’s say, for instance, you want to file the returns for the first quarter of the year, which is from 1st January to 31st March. You will have to send in these submissions by 30th April.
So how can you solve this mistake? You can start by investing in software that does automatic tax filings for small businesses. If this doesn’t work for you, you can always outsource your tax filing to a firm that will ensure they get the job done on time.
As a small business owner, you probably have a lot of things to think about besides taxes. Finding the right payroll provider can help you stay focused on the key aspects of your business that matter, such as increasing sales and making more profits. Payroll software eliminates the stress of filing forms, paying employees, and withholding state and federal taxes. It also doesn’t hurt to have an experienced payroll officer in your business to further reduce the risk of costly mistakes. If you can, invest in both, and you’ll save yourself a lot of time and money that could have gone to paying penalties.