Last Monday, we reviewed hiring issues that can wreak havoc in small companies. In this second blog of our three-part series, we will look at the two areas in payroll administration that, if not handled correctly, can lead to serious problems in your business.
One of the main headaches of operating a small business, especially in the first year, is the difficulty in maintaining a good profit margin and “keeping your head above water.” However, it would behoove every small business owner to beware of becoming lax and not managing payroll taxes. The IRS can be unforgiving when it comes to falling behind on payments owed to them. The three major penalties are failure to file, failure to deposit, and failure to pay. There are defined periods for the payments of payroll taxes and deposits must be made within three days of the payroll check date. If you fall behind, the IRS will assess a penalty of 33% plus interest and the Trust Fund Recovery Penalty (TFRP) allows the IRS to recover uncollected taxes from a business owner individually. Because small businesses account for the largest source of uncollected tax, they are always on the IRS’s radar, so to speak. Unpaid payroll taxes can also result in criminal charges if the IRS can prove that the taxes were intentionally not paid.
Another business area that is fodder for employee lawsuits results incorrect payroll practices, especially as they relate to state and federal minimum wage laws and overtime.
Business owners must ensure that regardless of the size of your business, you are paying at least minimum wage. Small companies sometimes have a tendency to make verbal agreements to pay employees lower than federal and state minimum wage and offer other “incentives” as compensation, such as flexible work hours or the ability to work from home. This does not stand up in court and companies are then forced to pay damages plus back pay. Wages are absolutely not negotiable below the federal government’s mandated standards, and also be sure to display the required notice regarding minimum wage in your place of business.
With regard to overtime, the Fair Labor Standards Act (1938) defines a maximum work week as 40 hours; overtime of one and one half times the regular hourly wage for all time worked over those 40 hours is required by law. The only employees who are not subject to this rule are those who are exempt (e.g., salaried vs. hourly). Remember that in order to be considered an exempt employee, the individual must earn a minimum salary of $455.00 per week and perform duties that are executive, administrative or professional in nature. There are some exceptions to this rule that are best explored with a certified professional in human resources or your CPA.
Payroll taxes and employee classification (exempt vs. non-exempt) are just two issues that can result in significant fines and penalties. Next Monday, we will wrap up our three-part series by discussing disciplinary policies.
So far in this three-part series on common HR issues in small companies, we’ve looked at hiring practices that can be devastating and payroll issues that can prove tricky to navigate. In this final installment we will discuss disciplinary policies.