Depending on what end of the pay stub you are on, payroll is a pleasure to receive and a bore manage. According to Holly DeVito, president of Sum of All Numbers, a bookkeeping company, “Payroll is boring to work in and nothing exciting happens, but there are a few stupid things small businesses do with their payroll worth noting.” Those stupid things happen to be quite common and can be costly once the IRS gets involved.
So when considering payroll and your company, here are a few things to think about:
Know your state’s laws.
California, where DeVito works, it is state law that non-exempt employees must be paid every two weeks. Companies that don’t pay on time are subject to fines and lawsuits. “Here in California, if you don’t pay within 24 hours of the agreed pay date, you can get fined and the employee can report you to the state,” says DeVito. “It’s a breach of contract.”
Employees paid once a month vs. every two weeks pay higher taxes.
If you’re a paid employee receiving checks less frequently, on only a monthly basis, you may be paying a higher tax for that larger chunk of dough. “Say you’re making $10K a month instead of two payments of $5K, the IRS has it set up where they assume you’re still getting two paychecks and actually making $20K a month, and tax you that way.” Of course you correct it come tax time, but “the IRS gets to keep the money free of charge all year,” says DeVito. In essence, paying twice a month as opposed to once a month is better for companies struggling with cash flow.
Bimonthly payments tend to be more reliable than every two weeks.
The standard payroll system pays every two weeks. The processing fees are a bit more for a company paying every two weeks because there can be three checks in a month. (It’s more or less negligible.) The real reason the companies prefer to pay bimonthly and not every two weeks is because of the convenience for the payroll department. “I pay on the 5th and the 25th of each month, so I know I have payroll on those days,” says DeVito. “If it were every other Friday, it would be harder to keep track.”
The IRS hates employers that pay their employees as independent contractors.
Besides having employees who slow down the processing of forms and employees who don’t pay their taxes on time, the biggest payroll issue DeVito encounters is companies that pay their employees as independent contractors when they’re treated as employees. “The IRS is coming down hard on businesses pushing this employee tax issue and they have no problem auditing for that,” says DeVito. There are four qualifications to be an independent contractor: 1. You must use your own equipment. 2. The contractor tells the employer when they will do the work instead of being told to come in. 3. The contractor determines how much the pay is. 4. The contractor doesn’t need training for the work. Some of DeVito’s clients have gotten audited for ignoring her warning that they had been simply calling employees independent contractors because they didn’t want to pay taxes on the workers. “I had one client I told over and over who owned a spa/salon that massage therapists aren’t independent contractors, they are employees, but he didn’t believe me. The IRS issued $50K in penalties to him. When you mess with other people’s taxes as an employer, the IRS gets even angrier. This guy ruined his business and threw it all away by not paying his employee’s taxes.”
