If you run a small business with employees, setting up your payroll and managing it properly can seem like a gargantuan task. But it doesn't have to be! To help you out, we asked our payroll experts: What are the most common payroll mistakes American small business owners make? Here are the top three and how to avoid them!
1) Late Taxes
Classification of federal forms:
Form 941 (Employer’s QUARTERLY federal tax return):
File Form 941 ( Employer’s QUARTERLY Federal Tax Return) to report wages you have paid and tips your employees have reported to you, as well as employment taxes (federal income tax withheld, social security and Medicare taxes withheld, and your share of social security and Medicare taxes). Form 941 is due the last day of the month following the end of the quarter (for example it would be due April 30th for wages paid from January to March). Here’s further instruction for Form 941 from the IRS.
Form 944 (Employer’s ANNUAL federal tax return):
Some employers with small payrolls, including government employers, may file an annual return, Form 944 instead ofForm 941 each quarter. Form 944 is due on January 31 of the following year. The purpose of Form 944 is to reduce the burden on small employers by allowing them to file one return per year, and in most cases pay the employment tax with the return. Form 944 is designed for employers with an annual employment tax liability of $1,000 or less.
Employers may be eligible to file Form 944 because their estimated annual employment tax liability is $1,000 or less, and whoever wants to file this form, must contact the IRS for a request to file Form 944. Employers are not permitted to file Form 944 unless they are notified by the IRS to do so. Follow the link for further instructions from the IRS on Form 944.
Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return):
Most employers pay both a federal (FUTA) and a state unemployment tax. Generally, you are subject to FUTA tax on the wages you pay employees who are not household or agricultural employees; therefore, you must file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 2020 if:
- You paid wages of $1,500 or more to employees in any calendar quarter during 2019 or 2020, or
- You had one or more employees for at least some part of a day in any 20 or more different weeks in 2019 or 20 or more different weeks in 2020. Count all full-time, part-time, and temporary employees. However, if your business is a partnership, do not count its partners.
Follow the link for further instructions from the IRS on Form 940.
Forms for states are dependent on which state your business is located in. As an example, lets provide you with the information on the state of California (CA).
Classification of state(CA) forms:
Purpose of DE 9:
Employers use the Quarterly Contribution Return and Report of Wages (DE 9) to reconcile payroll tax payments and total subject wages reported for the quarter. You must submit a DE 9 AND a Quarterly Contribution Return and Report of Wages (Continuation) (DE 9C) each quarter. Please view the link for more information:
Purpose for DE 9C:
Employers use the Quarterly Contribution Return and Report of Wages (Continuation) (DE 9C) to report employee wages subject to Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and to report Personal Income Tax (PIT) wages and PIT withheld. Please view this link for more information:
Also, here’s the link to California Employer’s Guide, which would give you a general breakdown of all the state tax forms including DE9 and DE9C which you require.
Everything mentioned above is strictly related to Filings, which is different from making tax payments. Many employers confuse filing frequencies (explained above) with tax deposit frequencies (aka tax payment frequencies). You can find out your state tax deposit frequency by contacting the State Department of Revenue where your business is located. Here is a brief explanation about federal tax deposit frequencies:
Generally, you must make deposits according to one of two deposit schedules, monthly or semiweekly.
Monthly Schedule Depositor – If you reported taxes of $50,000 or less during the lookback period, you are a monthly schedule depositor, and you must deposit your employment taxes on payments made during a given month or before the 15th day of the following month. For example, you must deposit taxes on payments made in January by February 15. If the 15th of any calendar month falls on a Saturday, Sunday, or legal holiday, the deposit is due by the next business day.
Semiweekly Schedule Depositor – If you reported taxes of more than $50,000, you are a semiweekly schedule depositor, and you generally must deposit your employment taxes based on the following schedule:
- If your payday is on Wednesday, Thursday, and/or Friday, you must deposit these taxes by the following Wednesday.
- If your payday is on Saturday, Sunday, Monday, and/or Tuesday, you must deposit these taxes by the following Friday.
Another one of the BIG misunderstandings we see is that many employers are not aware about exemptions. Marking yourself (employer) or any employee exempt from taxes causes incorrect tax calculations, which then results in penalties.
You can find out if you are exempt from taxes by contacting your federal or state departments. This short step will save you from penalties and keep you in check with correct tax calculations.
3) Report your new employees
Another mistake new employers make is failing to properly report when they hire a new employee. This is one of many important payroll steps you need to take when running your business. Keep the following things in mind when you’re hiring a new employee:
First, you are required to fill out a form called the I-9. This is an employment eligibility form that your employees must fill out to be able to work legally. You do not need to file Form I-9, but you must keep it in your records for three years after the hire date, or for one year after the date termination, depending on which one is later. You must also be able to supply these forms in case of an audit.
Second, most states require some type of reporting for new hires, separate from the I-9 form. You can find resources on new hire reporting in each state on the Small Business Administration website.
Avoid mistakes and succeed with payroll
Now you know some of the common payroll pitfalls to avoid when running your business. But there are also payroll best practices you should focus on to keep your business running like a well-oiled machine. When you're able to both avoid mistakes and flex best practices, you'll be able to take your business to the next level.
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.