ARTICLE | April 10, 2023

Payroll mistakes can be costly for both employees and employers. From incorrect information on employee forms to misclassifying workers, errors can lead to penalties and back taxes. In this article, we’ll explore five common payroll mistakes to avoid, including errors in Social Security numbers, misclassification between W-2 employees and 1099 contractors, mistakes in Social Security limits, errors on Form 941, and applying tax payments to the wrong quarter. By understanding and avoiding these common pitfalls, employers can save time, money, and headaches down the road.

1. Mistakes in Employee’s Social Security Number, Address, and/or Name

An error in an employee’s Social Security number can cause a misapplication of funds that results in changes to the W-2 and the state unemployment return. An incorrect address will cause a delay in the timely filing of W-2s.  Also, if a nickname was used instead of a legal name (for example: Christopher goes by ‘Chris’ or Catherine goes by ‘Cathy’), you will receive a no-match letter for the W-2 from the Social Security Administration.  When these corrections are delayed, the Employer will face a $50 penalty for each occurrence.  

2. Mistake in misclassification between W-2/Employee vs 1099/independent contractor

Misclassifying employees by sending a 1099 form to a W-2 employee will cause an individual to pay a higher tax for self-employment.  This will result in the employer owing back taxes and unemployment taxes, in addition to owing any unpaid wages and benefits.  The employer may also owe both state and federal misclassification penalties. 

3. Mistake in Social Security Limits

Make sure to monitor payroll software and updates to avoid over or under-withholding from employees when the social security limits change.  This error may cause additional penalties besides the extra time it takes to amend and explain the error to employees.   

4. Mistakes on Form 941

The Schedule B and line 12 on Form 941 must always match. The IRS will send you a notice and you may owe a penalty if these two lines don’t match.  

5. Applying tax payments in the wrong quarter

When paying your payroll taxes via EFthe TPS website, ensure you select the correct quarter. Applying tax payments to the wrong quarter could cause over or under-payments and you will receive a letter from the IRS notifying you of this issue.  This will also cost you a significant amount of paperwork and time to correct it.

Avoiding payroll mistakes is critical to ensuring accurate payments and avoiding costly penalties. By taking the time to carefully review and double-check information, monitoring changes in Social Security limits, and paying close attention to Form 941 and tax payment dates, employers can minimize the risk of errors in their payroll processes. Ultimately, implementing best practices for accurate payroll management can help businesses to ensure their employees are paid correctly and on time while avoiding the financial and reputational risks associated with payroll errors.