You are currently viewing Payroll: More Complex Than Meets the Eye

Payroll: More Complex Than Meets the Eye

Payroll is kind of the red-headed stepchild of accounting. And that’s really saying something because everyone hates accounting! Even on the payroll section of my own website I talk about how I don’t much care for it. It’s boring, tedious, and seems deceptively simple. In reality, it is very easy to make mistakes and those mistakes are often quite costly. You also have monthly filings in most cases and basic arithmetic tells us that the eventual chance for error increases with every iteration. So I asked my payroll guru Jen Stevenson to write up some examples of things she has run into during her 13 year payroll career to illustrate some of the risks:

Experience 1: A man, let’s call him Joe, was doing his own payroll. Since he was the only one being paid Joe assumed that he was a quarterly tax filer. After all, it was just one person and the amount was a pretty small – why would he need to pay more often? Joe’s taxable income was $5,000 per quarter.

After a while, Joe started getting notices from the IRS for failure to pay on time and that’s when I got the call. Joe was in a panic. Not only did he have penalties, but the letters were stacking up and threatening to seize his accounts. These types of notices should never be swept under the rug. They will continue until the government gets their money. And all the while you are accruing more and more penalties and interest!

Joe and I read over all of the notices and paid everything that was due immediately. I then drafted a letter to answer the IRS and request they abate the penalties and interest. I am often able to get these penalties removed, but Joe had waited so long that it was past the deadline to appeal for an abatement. This mistake cost him over $1,000! Relative to the amount of his actual payroll, this was huge. And frankly this was a mistake that is pretty easy to make if you aren’t a payroll professional. This needlessly cost him a lot of time and stress and the penalties were more than my services would have cost for the year!

I picked up Joe as a client that day and he hasn’t paid a penalty since.

Experience 2: “Patty” called me in a panic – having gotten my contact info from Micah. The IRS had sent her notices because she apparently did not file her 940 quarterly filings. We are not talking about the payments, but the actual paper/electronic file for her annual reconciliation on her 940 payments. Every year end this filing is due (in addition to the bi-weekly or monthly filings and quarterly reconciliations). She had no clue, even though her payroll software was supposed to create this filing for her.

Patty didn’t know that she had to manually create the file, because it is not a payment showing a due date. And because of this, her accounting software was not notifying her of that the filing was due. And again, why would she know? This had nothing to do with her profession. This was a necessary evil of doing business for her – nothing more.

Since it takes the IRS some time to find these mistakes, Patty had no clue she was wrong until the notices arrived. By the time she received the first notice she was 3 years behind! Patty said what most of my clients tell me: she really thought payroll was simple. You just pay your employees and taxes. But it is so much more complex than that, as I explained and she found out firsthand.

Patty now completely understood and asked me to take care of it. “Whatever it takes, just make it right.” I looked at the notices again, came up with a plan, and executed it. I was able to get all of the penalties and interest waived for Patty and saved her $600!

Patty became a payroll client that very day, saying she no longer wanted the added stress in doing payroll.

The penalties you pay vary by what infraction the IRS charges you with. But they fall into 3 basic categories:

  1. Failure to file a tax return
  2. Failure to pay the amount owed
  3. Failure to make a deposit of taxes

The failure to file penalty is 5% per month (capping at 25%), failure to pay penalty is 0.5% per month (again capping at 25%), and the failure to make deposit penalty ranges between 2-10% (capping at 15%). These add up very quickly and can far exceed the cost of having a professional do your payroll for you!

I advise all of my clients to get someone who truly knows what they are doing to take care of the technical aspects of their life and business. Be it investing in financial markets, building websites, having someone fix your roof, and yes – even payroll – it always pays to have a true professional take care of it.

Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.