Managing payroll can be an intimidating task, especially for small business owners who may not have extensive knowledge in this area. Failure to comply with payroll regulations can lead to DOL audits such as the Wage and Hour audit to check that your business is in compliance with the Fair Labor Standards Act (FLSA). If violations are found through payroll mistakes, your business may be subject to fines and orders to issue backpay or back taxes, which can be costly and time-consuming. Because of this, it’s important for businesses of all sizes to comply with state and federal payroll laws.
Avoid These Common Payroll Mistakes
Here are some of the biggest payroll mistakes that can lead to audits and fines:
- Misclassifying employees
Misclassifying employees can have serious consequences. The two most common classifications are employees and independent contractors. Employees are individuals who work for you and are subject to payroll taxes, while independent contractors are self-employed and responsible for their own taxes. Misclassifying an employee as an independent contractor can lead to penalties and back taxes. The IRS has strict guidelines for determining whether a worker is an employee or independent contractor, so it’s essential to get it right.
- Failing to withhold taxes
Employers are required to withhold federal income tax, Social Security tax, and Medicare tax from their employees’ paychecks. Hawaii law also requires employers with one or more employees to withhold state income tax from both resident and non-resident employees’ wages for services performed in Hawaii and remit the amounts withheld to the Department of Taxation by the tax deadline.
Failure to follow these rules can result in penalties and fines. It’s essential to stay up to date on the latest tax rates and to ensure that you’re withholding the correct amount from each employee’s paycheck.
- Failing to pay payroll taxes
In addition to withholding taxes from employees’ paychecks, employers are also responsible for paying payroll taxes. This includes the employer’s share of Social Security and Medicare taxes, as well as federal and state unemployment taxes. Failure to pay these taxes can result in significant penalties and interest charges. It’s important to make these payments on time and accurately to avoid any issues.
4. Not complying with state and local tax laws
In addition to federal tax laws, employers must also comply with state and local tax laws. This includes withholding and remitting state and local income taxes, as well as complying with state and local labor laws. Employers need to withhold Hawaii income taxes on employee wages and then pay the withheld taxes to the State of Hawaii, Department of Taxation (DOTAX).
5. Not keeping accurate records
Keeping accurate payroll records is essential for compliance with tax and labor laws. This includes maintaining records of employee wages, hours worked, and tax withholdings. It’s important to establish a record-keeping system and keep it up to date.
6. Failing to provide accurate W-2s
Employers are required to provide their employees with accurate W-2 forms at the end of each tax year. This form summarizes the employee’s earnings, taxes withheld, and other relevant information. Failing to provide accurate W-2s can result in penalties and fines so it’s important to review these forms carefully to ensure accuracy before issuing them to employees.
7. Paying employees incorrectly
Paying employees incorrectly can lead to many problems, including audits and fines. This includes underpaying or overpaying employees, failing to pay overtime correctly, failing to pay the minimum wage, and not paying for all hours worked. In addition, Hawaii’s pay frequency laws require employers to pay employees at least twice during each calendar month, on regular paydays selected in advance by the employer. Earned wages for all employees are due within seven days after the end of the pay period.
- Not complying with overtime laws
Employers must comply with federal and state overtime laws, which require employers to pay non-exempt employees’ overtime for hours worked over 40 in a workweek.
Best payroll for small business
Managing payroll can be challenging, but it’s essential to comply with tax and labor laws to avoid audits and fines. Many small businesses rely on HR partnerships with Professional Employer Organizations (PEOs) to ensure that they are complying with both federal and state wage and hour laws and other payroll laws.
We are proud to be named to Hawaii Business Magazine’s 2023 Best Places to Work and Pacific Business News’ 2023 Hawaii’s Best Workplaces list. If you’re looking for comprehensive HR solutions for your business, we’ve got you covered through HR outsourcing.
When you partner with Makai HR you can get on with the business you are trying to grow while we take care of your employee needs from payroll to taxes, health insurance/benefits and worker’s compensation. You also gain peace of mind that you are compliant with all of Hawaii’s employer laws (if you’ve ever looked you know that the list is very long and changes happen). When choosing a PEO to partner with, there are many things to consider including cost, services, and technology solutions.
With the cost of doing business in Hawaii at record highs, we know how important it is to keep labor costs in line with revenue. Our plans are priced competitively and include value-added services like time-in/time-out systems. Our customized PEO solutions are tailored to the size of your business and specific needs. We offer a 100% paperless solution which means that your employees can manage their needs through a computer, tablet, or phone. We can truly improve your employees’ work benefits while freeing you up to operate your business.
What are you waiting for? Companies that partner with a PEO benefit from 7-9% faster growth, 10-14% lower employee turnover; and they are 50% less likely to go out of business. Contact us today to get started!