Did you hear about the $600 payroll mistake that cost a company nearly $45,000?
In Castro v. Precision Demolition, a Texas company failed to pay one of its employees $608.05 in overtime. The error was not caught in time and the court awarded the employee $1,216 in unpaid overtime plus penalties.
But that’s not all. The court also ordered Precision Demolition to pay $41,333 towards the employee’s legal fees. In total, the company ended up paying $42,459 for a single payroll error – and that doesn’t include its own legal costs.
The message is clear. Even a common payroll mistake can cost a company a small fortune. Below are three mistakes that businesses often make, any one of which can cause both legal trouble and financial loss.
1. Misclassifying Employees as Independent Contractors
In general, your workers are classified as either employees or independent contractors. Each worker’s classification dictates the following:
- How you report their compensation to the IRS (W-2 vs. 1099)
- Whether they are entitled to benefits like health insurance coverage and retirement benefits
- Whether they are subject to federal income tax and employment tax withholding
There has been a fair amount of litigation on this subject in recent years. For example, in July 2018, the New York Unemployment Insurance Board ruled that Uber drivers were employees entitled to unemployment insurance coverage.
Understanding the difference between the two worker categories can prevent legal issues later. If you do misclassify any of your workers and discover the mistake, the Voluntary Classification Settlement Program allows qualifying employers to voluntarily reclassify the workers as employees and become compliant by paying 10% of the taxes that may have been due on wages paid to these workers for the most recent tax year.
2. Misclassifying Nonexempt Workers as Exempt
There are two primary classifications of employee:
- Exempt, meaning that they are not entitled to overtime pay. Under the Fair Labor Standards Act, this generally applies to those in so-called “white collar” positions who are paid a salary and make more than $455 a week, or $23,660 annually, although there are exceptions.
- Nonexempt employees, who must be paid overtime when they work over 40 hours per workweek.
If you misclassify an employee as exempt, you will owe them back pay when the mistake is discovered.
3. Paying Taxes Incorrectly
Tax laws are subject to change. If you aren’t aware of these changes and fail to pay the correct amount of payroll taxes, you’ll owe the missed amounts plus interest and penalties. To avoid this outcome, start each new year by confirming the required taxes for your business at the local, state, and federal levels.
Contact an Employment Law Attorney
Payroll mistakes can cost a company heavily. To reduce the risk of an unintentional misclassification or tax underpayment, contact an employment law attorney at Rosen Law, LLC who can review your personnel and payroll records to confirm your compliance with current employment and tax laws. If there are issues, we will help you address them with the appropriate entities and negotiate for a fair resolution. To schedule a consultation, please contact our office.