The 6 Most Common Payroll Mistakes (And How to Avoid Them)
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The 6 most common payroll mistakes (and how to avoid them) www.gusto.com | 1 (800) 936–0383 Hi! Table of contents Running your business is a lot of work. The last thing you want to worry about is 01_ 04_ a costly mistake from an accounting or How do you maximize your tax deduction Is accrual or cash accounting best for payroll related misstep. This is important and minimize tax exposure? your business? because with all the complicated rules and regulations, a lot can go wrong. 02_ 05_ We worked with leading accounting How frequently should you pay and file How do you avoid misclassifying software provider FreshBooks and taxes to avoid tax penalties? employees and contractors? identified the six most common accounting and payroll mistakes that can cost your business. 03_ 06_ Knowing where the pitfalls are is just the How do you manage receivables to get What payroll and accounting reports do first step. In this guide, we’ll also provide cash back into your business? you need to keep on file? you solutions and best practices so your business won’t fall into those traps. www.gusto.com | 1 (800) 936–0383 01 How do you maximize your tax deduction and minimize tax exposure? www.gusto.com | 1 (800) 936–0383 A common mistake for most the receipt is unclear, and end up triggering small business owners is the an audit. mismanagement of expense Even if you’re confident you’re safe on taxes, tracking, particularly when it poor expense management means you have comes to receipts. How often poor insight into your company’s spending. do you find yourself asking: Rather than wait until tax day to organize Customer story your expenses, you should consider tracking I’ll take care of these receipts when them as close to real-time as possible to Your business requires a lot of travel I prepare my tax return. better manage your company’s day-to-day and you take taxis frequently. Rather Unfortunately, this is a common operations. than wait until tax time to see the mistake made by novice and seasoned impact of your travel expenses, use entrepreneurs alike. Receipts can become an online accounting vendor. This Consider using an automated service faded and unclear, or even worse, lost. way, you can sync your expenses to provider to track your expenses as your reporting software and track The impact on your business can be very they come in. With a provider like your expenses in real time. meaningful, particularly around tax time. FreshBooks, for example, you can Without proper expense management, import prior expenses from your credit you may miss expenses on your tax return, card or bank accounts. which means fewer deductions. You may also mis-categorize an expense because www.gusto.com | 1 (800) 936–0383 02 How frequently should you pay and file taxes to avoid tax penalties? www.gusto.com | 1 (800) 936–0383 As an entrepreneur, taxes are probably the last thing on your mind until April. You may think: I’ll reconcile my tax payments at the end of the year. But it turns out you may have to pay payroll-related taxes year-round. The IRS and each state regulate your tax payment schedule, and the schedule differs between each state. Customer story The frequency of your tax payments also depends on your payroll frequency (e.g., monthly, biweekly). 40% of small businesses get fined an average of $850 per year for improperly Your business pays monthly payroll paying their payroll-related taxes so this is not a small concern. for most of your employees and semimonthly for others. Rather than It’s important to pay attention to IRS and state notices mailed to you year-round. Each state pay taxes according to the employee’s has its own set of regulatory bodies for payroll tax compliance. pay period, you pay taxes monthly for everyone. Because you are not On the following pages is the complete list of state governing bodies for labor and payroll: matching your taxes based on pay period, you may be at risk for tax penalties. To protect your business, outsource your payroll to a third-party provider. www.gusto.com | 1 (800) 936–0383 ALABAMA CONNECTICUT IDAHO Dept. of Labor Dept. of Labor Dept. of Labor Dept. of Revenue Dept. of Revenue Services State Tax Commission ALASKA DELAWARE ILLINOIS Dept. of Labor and Division of Revenue Dept. of Employment Security Workforce Development Dept. of Labor Dept. of Revenue Dept. of Revenue DISTRICT OF COLUMBIA IOWA ARIZONA Dept. of Employment Services Dept. of Revenue Dept. of Economic Security Office of Tax and Revenue Workforce Development Dept. of Revenue FLORIDA KANSAS ARKANSAS Dept. of Economic Opportunity Dept. of Labor Dept. of Finance and Administration Dept. of Revenue Dept. of Revenue Dept. of Workforce Services GEORGIA KENTUCKY CALIFORNIA Dept. of Labor Career Center Dept. of Industrial Relations Dept. of Revenue Dept. of Revenue Employment Development Dept. Franchise Tax Board HAWAII LOUISIANA Dept. of Labor and Industrial Relations Dept. of Revenue COLORADO Dept. of Taxation Workforce Commission Dept. of Labor and Employment Dept. of Revenue www.gusto.com | 1 (800) 936–0383 MAINE MISSOURI NEW MEXICO Dept. of Labor Dept. of Labor Dept. of Workforce Solutions Revenue Services Dept. of Revenue Taxation and Revenue Dept. MARYLAND MONTANA NEW YORK Dept. of Labor Licensing & Regulations Dept. of Labor and Industry Dept. of Labor Comptroller of MD Dept. of Revenue Dept. of Taxation and Finance MASSACHUSETTS NEBRASKA NORTH CAROLINA Dept. of Revenue Dept. of Labor Dept. of Labor Labor and Workforce Dev. Dept. of Revenue Dept. of Revenue MICHIGAN NEVADA NORTH DAKOTA Dept. of Licensing and Regulatory Affairs Dept. of Employment, Dept. of Labor and Human Rights Training and Rehabilitation Dept. of Treasury State Tax Commission Dept. of Taxation MINNESOTA OHIO NEW HAMPSHIRE Dept. of Employment and Dept. of Job and Family Services Dept. of Labor Economic Development Dept. of Taxation Dept. of Revenue Employment Security OKLAHOMA MISSISSIPPI NEW JERSEY Employment Security Commission Dept. of Employment Security Dept. of Labor and Tax Commission Dept. of Revenue Workforce Development Division of Taxation www.gusto.com | 1 (800) 936–0383 OREGON TEXAS WASHINGTON Employment Dept. Workforce Commission Dept. of Labor and Industries Dept. of Revenue UTAH PENNSYLVANIA WASHINGTON DC Dept. of Workforce Services Dept. of Labor and Industry State Tax Dept. State Tax Commission Dept. of Revenue Workforce West Virginia VERMONT RHODE ISLAND WEST VIRGINIA Dept. of Labor Dept. of Labor and Training Dept. of Workforce Department Dept. of Taxes Division of Taxation Dept. of Revenue VIRGINIA SOUTH CAROLINA WISCONSIN Dept. of Taxes Dept. of Employment and Workforce Dept. of Workforce Services Dept. of Labor Dept. of Revenue SOUTH DAKOTA Dept. of Labor and Regulations With all these state regulations, it may be a challenge to stay compliant. TENNESSEE Fortunately, a full-service payroll provider like Gusto should manage these Labor and Workforce Dev. tax payments so you don’t have to. www.gusto.com | 1 (800) 936–0383 03 How do you manage receivables to get cash back into your business? www.gusto.com | 1 (800) 936–0383 As a business operator, you may may invoice your customer the wrong be too busy selling your product amount. Or you may forget to bill them and forget about collecting on your entirely! receivables. It’s easy to just think: To protect yourself from cash shortfalls due If I just focus on getting customers and to poor invoicing, consider using an online delivering good service, my business will vendor to automate the process. A vendor Customer story succeed. can help you: Your business provides a minor Invoice as soon as the project is finished But a lengthy Days Sales Outstanding service for a customer and you send an invoice shortly after. Because you (DSO) means you’re extending a lot of Track the work throughout the did not have any systems in place to credit to your customers and not collecting engagement cash quickly enough. This means you’re remind yourself of the outstanding leaving your balance sheet exposed to cash Automate follow-ups, especially if payment, you forget and you don’t shortfalls. In addition, invoices can come at payments are late collect. an unpredictable rate. If you’re not matching Accept payments online your revenue with your expenses as they come, you can hit working capital issues. Create an online paper trail for clients and regulators Without proper invoicing, your business is open to costly mistakes. For example, you www.gusto.com | 1 (800) 936–0383 04 Is accrual or cash accounting best for your business? www.gusto.com | 1 (800) 936–0383 There are two types of accounting Accrual accounting: This type of accounting methods: cash and accrual recognizes revenue and expenses when they accounting. You may wonder: are earned, regardless of when cash is pa id in or out. My business is too small for my accounting methods to have any impact. Customer story Actually, which method you choose can have a meaningful impact on visibility into Your business is growing quickly so your business operations. Your accounting you decide to hire a team member method can provide direct insight into to build out your FP&A group. Since the financial health of your business and you’re looking to project P&L, you inaccurate accounting can lead to fines. decide to switch from cash accounting to accrual accounting. First, let’s define the two methodologies: Cash accounting: This type of accounting recognizes revenue when cash is received and expenses when cash is paid out. Under this method, there is no accounts receivable or payable.