Top 5 Payroll Tax Pitfalls Staffing Firms Should Avoid

Payroll Tax Pitfalls to AvoidIt may not be your favorite part of running a staffing firm, but when it comes to payroll taxes, they have to get done (and it’s important that they’re done correctly). With the IRS cracking down on small businesses and increasing consequences for incorrect payroll tax filing, it is more important than ever that your taxes are filed and reported on time, without mistakes.

In this blog post, we’re outlining 5 of the most common payroll tax pitfalls facing staffing agencies, and tips to help avoid them:

  1. Not Understanding Your Costs

The cost to hire an employee is more than just hourly wages. As an employer, you are also required to pay payroll taxes on the wages your employees earn. These taxes include things like Social Security, Medicare and unemployment, and can add up quickly if you’re not prepared. It is important to take the true cost of an employee into account before you make your next hire, so you don’t end up with a cash crisis at tax time.

  1. Not Documenting or Responding to Notices

If you receive a notice from the IRS, it is important that you document and respond as soon as possible. Tax notices could be sent for any reason, and it is important that you understand issues that arise and work to get them resolved. Small businesses have been identified as the largest source of uncollected taxes, so if you do not respond to your notices, you could be putting your business at risk for an IRS audit and harsh penalties.

  1. Misclassifying Employees and Contractors

It is critical that you determine whether your temp workers should be classified as employees or independent contractors. This distinction is important because you are required to pay payroll taxes on wages paid to employees, while payroll taxes are generally not required for independent contractors. If you classify a worker as an independent contractor when they should be considered an employee, you could be facing steep interest payments, fines or even criminal punishments.

  1. Borrowing Funds and Making Late Deposits

When a cash crisis occurs, pulling money withheld from employee paychecks can seem like an attractive short-term solution, but be wary. The money collected for payroll taxes does not belong to your business and must be accounted for and paid to the government. If you dip into the funds now, you may not have the resources available to pay your payroll taxes on time, which could put your entire business at risk. 

  1. Not Understanding Payroll Tax Basics

It is important that you understand the basics of payroll tax administration to ensure you file your payroll taxes correctly. For example: Did you know that you are supposed to file payroll taxes in the state where the work was performed, not the state where the worker lives? Did you know that some states require employers to pay both payroll taxes and income tax returns? If you aren’t familiar with the payroll tax basics, it is important that you work with a company that does in order to avoid harsh penalties.

How Can Advance Help?

At Advance, we have an in-house tax department and quality control team that are fully equipped to handle the burden of payroll tax administration for staffing firms located in all 50 states.  We can review your payroll, file your taxes accurately and anticipate the types of issues that could prompt an investigation.

With over 80 years of experience processing and filing payroll taxes, we know the rules and offer peace of mind knowing that your payroll taxes will be taken care of. We are here to help take on the burden of payroll tax administration, so you are freed up to do what you do best - run your temporary staffing firm.

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For more information, please visit the Payroll Tax Administration section of our website.