Common Payroll Mistakes Can Lead to Employer Liability

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Common payroll-related mistakes can lead to penalties and corrections that can have a dramatic effect on an employer's operations, especially for smaller businesses, said Angela Rudolph, a certified public accountant with Rutherford and Johnson P.C. in Winchester, Va.

Rudolph, who spoke Oct. 10 at a workshop at the 2014 Virginia Statewide Payroll Conference in Springfield, Va., outlined 12 payroll mistakes, referred to as the “dirty dozen,” that she has dealt with in her practice.

Misclassification of employees as independent contractors is among the most common mistakes employers make, Rudolph said. Failing to provide proper Forms 1099 to workers deemed to be independent contractors could negate possible reduced penalties, complicating efforts to counteract misclassification. In general, tardily filing forms also burdens employers, as does failing to use the federal Electronic Tax Payment System to pay taxes.

Some employers err on taxing too much, Rudolph said, causing them to sometimes mistakenly include legitimate tax-free expenses, such as Section 401(k) contributions, as taxable compensation. Another mistake employers make is failing to follow federal and state treatments of some pre-tax benefits, she said.

Beyond tax issues, employers frequently do not apply correct overtime calculations, fail to properly document and report new hires, do not monitor changes to unemployment tax rates, rely too much on payroll service providers or software processes and fail to properly secure sensitive employee and company information, Rudolph said.