When starting a new business, keeping track of hours worked by you and your employees might amount to jotting down some calculations on the back on a napkin while trying to finish a quick lunch before heading to your 100th meeting of the day. Dealing with expensive startup expenses and the constant reminder of due dates on your business loan often causes new business owners to avoid the cost of hiring a business accountant to take care of timesheets, invoices, payroll, and taxes. As businesses grow, however, the absence of an efficient and transparent accounting system can lead to serious economic hardships for mid-market companies. Payroll errors are one of the easiest errors to make, and when not caught in time, can lead to critical business losses.
The Internal Revenue Service (IRS) estimates that one-third of all employers make payroll errors in a given year, and small to mid-market businesses incur an average of $845 in tax penalties due to mismanaged payroll policies. Of course, payroll errors don’t only result in potential tax penalties, but can negatively affect your company in a number of other ways. Below, we take a brief look at how payroll mistakes can economically damage your company. We then identify a few of the most common payroll mistakes made and offer some simple suggestions to avoid these customary financial pitfalls.
How Can Payroll Mistakes Cost Your Company?
One of the most obvious economic effects of payroll mistakes are the subsequent tax penalties that can put a business in a dire financial situation. The IRS takes payroll taxes seriously. Failure to file your business taxes on time could cost your business a 15 percent failure-to-deposit penalty. Furthermore, payroll tax returns that aren’t filed in a timely manner could incur an additional 5 percent penalty.
Of course, not paying your payroll taxes could also lead to legal action related to both failure to comply with labor laws and federal employment tax laws. According to one source, businesses that do not conform to tax laws, including payroll taxes, could be looking at fines upwards of $10,000 along with potential lawsuits.
Even if your company is able to avoid penalties, fines and potential lawsuits, payroll mismanagement can also cost your company in other ways. The human resource cost of having to dedicate long hours to sort through bundles of employee time cards will not only reduce productivity, but might also require hiring an accountant or bookkeeper. With freelance accountants charging from $150 to $400 an hour, this can obviously lead to financial stress for mid-sized businesses.
Lastly, payroll mistakes can also lead to costly lawsuits brought against you by employees. While employee-filed lawsuits can affect any-sized business, one recent analysis found that “roughly 41.5% of employee lawsuits are brought against private companies with less than 100 employees. The financial damage of employee lawsuits can be dramatic; the cost of settling out of court averages $75,000, and the average jury award hits $217,000 if you go to court and lose.”
