Jeffrey Goldenberg,
Press Gold Group
952.926.8463
jeffg@pressgoldpayroll.com
Carl Pressman
952.926.8463
carlp@pressgoldpayroll.com
www.pressgoldpayroll.com
How to avoid
four common, costly
payroll pitfalls
SMALL-BUSINESS OWNERS can’t afford to get buried in tedious minutiae unrelated to their core businesses. But ignoring payroll-related pitfalls can be costly and catch owners unawares.
Four stand out. They’re common, potentially expensive and easily avoidable with a little research or help from an expert adviser.
1. Paying into a benefits black hole.
Minnesota Unemployment Insurance (UIMN) is a state program that provides temporary benefits to qualified persons out of work through no fault of their own, and is financed entirely by a special employer-paid tax.
Since 2005, the state of Minnesota has assumed that all working business owners who own at least 25 percent of their company are exempt from UIMN coverage. Unless these owners have specifically opted in, they don’t have UIMN insurance and haven’t for two years. Some owners, however, haven’t kept abreast of these changes, haven’t opted in and continue to pay into UIMN as though they were covered.
A seemingly minor administrative oversight like this can cost small businesses hundreds, if not thousands, of dollars each year. It’s a common mistake – so common, in fact, that many of our clients were caught in the UIMN maze until we guided them out.
On the other hand, business owners that do opt in and pay for UIMN coverage could gain some federal tax benefits that save money in the long run. (Ah, the infinite complexities of tax law!) Owners should consult their accountants or financial advisers to determine where they stand.
2. Paying into UIMN at yesterday’s rate.
Others are paying into UIMN at an incorrect or outdated rate. That’s not too hard to do, since rates may change based on the company’s longevity and its “historical performance” in terminating employees. In addition, new employers in certain industries that routinely have high unemployment are assigned a higher rate, no record required.
Small-business owners sometimes fail to adjust their unemployment rate at the appropriate time, which may result in unnecessary overpayment or underpayment penalties. The key to compliance without overpayment? Confirming the rate with the state each year and maintaining a file of supporting documents.
3. Employee overtime.
Employee overtime is another area frequently miscalculated by small-business owners. They frequently overpay or underpay, and either causes problems.
Check the math
To determine whether your company is calculating overtime (one and a half times an employee’s regular wage) correctly, try answering the following two questions:
Employee A earns $10 per hour and works 41 hours during the week. What does the federal government say his minimum overtime hourly rate must be?
The correct answer is $15.
Employee B earns $10 per hour and works 41 hours during the week. She also earns a one-time $200 bonus that week for referring a friend to work at the company. What does the federal government say her minimum overtime hourly rate must be?
The correct answer is $22.32, not $15.
Businesses must include total weekly earnings – including bonuses – when calculating overtime rates. Reimbursement for expenses, such as gas mileage, doesn’t count.
Since Employee B earned $600 for the week before overtime and her rate basis for that week is $15, then her overtime rate must be $22.32.
Here’s the math:
$10 (regular wage) x 41 hours = $410 (regular income)
$410.00 + $200 (bonus income) = $610
$610.00 / 41 hours = $14.88 (regular hourly wage, factoring in the bonus)
$14.88 x 1.5 (overtime rate) = $22.32 (overtime hourly wage, factoring in the bonus)
Overtime miscalculation is an easy target for disgruntled employees and their attorneys. Checking your math can save legal fees and headaches down the road.
4. Not benefiting by providing benefits.
Employee benefits also create big confusion for small-business owners. The assumption is that they’re all costly. Not so. There are actually some benefits that provide big rewards to both businesses and employees – without the big cost.
Hidden gems
One of the most underrated and underused employee benefits is the section 125 or “cafeteria plan” that allows employees to withhold a portion of their pre-tax salary to cover certain medical or child care expenses. Up to $5,000 per year can be deducted from an employee’s salary on a pretax basis.
Most employees are already paying for these expenses themselves with after-tax dollars. Cafeteria plans help them save money that’s already earmarked for these essentials. Cafeteria plans are free from federal and state income taxes, so the employee’s taxable income is reduced, thus increasing take-home pay. And because the pre-tax benefits aren’t subject to federal Social Security withholding taxes, employers don’t have to pay FICA tax or workers’ compensation premiums on those dollars.
The cafeteria plan is one of those hidden gems that the government doesn’t advertise. The plan isn’t difficult to implement. Once it’s in place, it starts paying off right away. Using section 125 can enhance a company’s employee benefits package and morale, while simultaneously boosting margins.
Payroll is a major expense for every business. The good news is that with care and counsel you can reduce payroll-related costs and avoid the penalties and pain associated with miscalculations and the four payroll pitfalls.
