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If you own a small to mid-sized business, running your payroll operations in-house could be more trouble than it’s worth. If you make a mistake on an employee’s pay or fail to get payroll done in time, you could lose your employees’ trust or even your employees. That’s a hefty price to pay for doing your payroll yourself.

That’s not the only thing you risk by taking care of your payroll in-house. Forty percent of small businesses rack up payroll-related IRS penalties each year. The average penalty is $845. That’s a lot of money to spend on a mistake.

The IRS is cracking down on small businesses, and you don’t want to get caught in the crosshairs. Know what the most common payroll mistakes are — and what you can do to avoid them.

Setup Errors

If you payroll operation isn’t correctly set up, it doesn’t matter how carefully you calculate your employees’ wages or whether you get payroll done right on time each pay period. You need to register your business and set up your federal, state and local tax withholding correctly. You also need to make sure you classify your employees properly. You could be in big trouble with the IRS if you withhold the wrong amount from your employees for state and local income taxes, Medicare and Social Security. You also don’t want to get caught incorrectly classifying an employee as an independent contractor or vice versa.

Failing to Make Tax Deposits Correctly or on Time

Once you’ve set up withholding correctly and you’ve taken the proper amount from both your employees and your business, do you know what to do with that money?

You need to know when and how often you should be depositing your tax payments, what forms you need to use, and whether you should deposit the funds electronically or the old-fashioned way. There are many rules about this, and they can be confusing. One thing’s for sure, you’ll be penalized if you mess it up.

Forgetting to Record Payments

One of your employees wants a payday advance, and you’re in a hurry, so you quickly write out a check. Or it’s the holiday season and you’ve decided to give your employees gift cards this year instead of cash bonuses. Did you remember to record those in your payroll processing system? Many times a small business has found itself struggling to balance the books because of a forgotten record of a payment or two.

Doing Payroll Late

If you get into a hurry with your payroll calculations, you could pay someone too little or too much, and that will throw off your books and possibly damage employee morale. However, you can’t do payroll late, or you’ll be asking for a slew of disgruntled employees. Once you lose your employees’ trust, you could never get it back. Further, failing to do your payroll on time could mean late tax deposits, and IRS penalties.

Forgetting to Update State Unemployment Rates

Your state unemployment rate (SUI) rates can change over time. If you get a new rate from your state agency and you forget to change your payroll system accordingly, your filings will end up misconstrued. Naturally, you’ll get fined for that too.

Protect Yourself from Payroll Mistakes

Luckily, there’s an easy way to avoid payroll mistakes. You can outsource your payroll services to a professional employer organization like ours.

Outsourcing your payroll services saves you time that you’d otherwise spend working on, and no doubt struggling with, your payroll — and that includes all the hours you’d spend wondering and worrying if you did your payroll correctly. Outsourcing your payroll to a PEO is typically much cheaper than hiring a dedicated HR person, and you don’t have to worry about losing the employee to another company, to illness or to extended leave.

When you choose to outsource your payroll services, you don’t have to worry about incurring tax penalties or any other kinds of fines. Your payroll will be in the hands of professionals who know the tax and employment laws inside and out — and that’s even more important these days, when new legislation and health care reform are making employment law compliance more complicated than ever before.

There will be no worries about using the wrong tax tables, updating your payroll software or doing your calculations correctly. You won’t have to run yourself ragged trying to be an accounting expert on top of everything else you do for your business.

Best of all, you’ll be able to easily offer your employees great benefits like direct deposit and 401(k)s. Paychecks will be issued on time every month and there will be no mistakes, so your employees will be happy and you’ll be happy too.

More than a third of small businesses cough up tax penalties each year because of payroll mistakes. Don’t let it happen to you. Outsource your payroll services now, and get a professional in your corner.

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