Avoid Payroll Headaches: Items to Consider When Processing Your Payroll

Avoid Payroll Headaches: Items to Consider When Processing Your Payroll

Aside from daily responsibilities – operating a business and staying on top of the game – payroll is a daunting task that all too often causes problems for business owners.

If you do payroll in-house, make sure you know the lay of the land. Know your tax rates and due dates. Know your deductions. Know your rules and know your withholdings.

First double-check your tax tables to be sure both federal and state taxes are correct. “Specifically, watch the tax rates on your payroll software,” said Lisa Milazzo, a member of Rea’s payroll team in Millersburg. “Sometimes local income tax rates are changed mid-year, but they won’t show up in the software updates until the following year. If you pay taxes based on old rates, you could end up costing yourself and your employees money.”

The frequency and method of payroll tax payments is usually determined by the size of your payroll and amount of your payroll tax payment. Large employers, for example, must make a deposit after each payroll period, while smaller employers can make their deposit monthly or quarterly. You are responsible for knowing when and how to make your payments.

“The remittance of payroll taxes, including employee withholdings and employer paid taxes, needs special attention,” said Milazzo. Each taxing authority has its own guidelines and deadlines. Miss a deadline and you can count on receiving notices and penalties. “The penalties for late payments can be almost as much as the total tax due,” she warned.

Calculating payroll taxes is anything but straightforward, with “pre-tax” deductions for pension plan contributions, health insurance, flexible spending plans and other employee benefits muddying the waters. Some items are deducted before federal and state income taxes but are subject to city income taxes, Social Security and Medicare. Others are deducted before any taxes are calculated. If you tackle payroll on your own, make sure you understand your deductions.

“It’s also imperative to know, understand and follow the rules for complex areas like overtime, child support and tipped employees,” said Milazzo. If an employee has several withholding orders and his or her wages are not enough to cover all of the child support orders and garnishments, you must know the priorities of the orders.

Withholding requirements for city and school district income taxes can also get sticky. As an employer, you must withhold city income taxes based on where your employees work. If your business is headquartered one city but you have smaller operations in surrounding cities, you are required to withhold income taxes in each of the cities where your employees work.

You must withhold school district income taxes, on the other hand, if you have employees who live in a school district that has a school district income tax, regardless of where they work. Since only certain school districts have an income tax, the challenge is to determine for which employees you are required to withhold school district income taxes.

It’s important to have your payroll and payroll taxes done accurately. Headaches can be avoided by outsourcing this function. However, whether you process payroll internally or not, be sure it’s done properly to avoid errors and penalties.