Payroll mistakes are many and varied, from misclassification of employees to misreporting wages. And payroll mistakes such as these can have significant negative impacts for your company:

Misclassifying employees as independent contractors

This exposes employers to substantial legal costs and penalties. In an effort to increase collections, the Internal Revenue Service and state agencies have ramped up investigations of misclassified employees.

When a misclassification is discovered, the employer becomes liable for unreported and undeposited withholding taxes, Social Security and Medicare contributions, penalties, and possibly employee benefits. When the Internal Revenue Service deems the misclassification to be negligent, the penalties can be up to 100 percent of the uncollected taxes.

The payment of unreported taxes and contributions isn’t just for the past year. If the Internal Revenue Service and state agencies discover the misclassification of just one or two employees, this can trigger audits of the employer’s employment for prior years.

If a notice from the Internal Revenue Service is ignored, the penalty jumps to 15 percent, plus interest on the amount not deposited, plus 100 percent of the uncollected amounts if the failure to deposit is willful.

Under-withholding and failing to match required amounts

The employer’s obligation is to withhold income tax, Social Security, and Medicare contributions from employees’ pay, as well as match the Social Security and Medicare contributions.

Failure to do so subjects the employer to late deposit penalties of up to 15 percent of the under-withheld and under-deposited amounts. If the Internal Revenue Service deems the under-reporting or under-depositing willful, the penalties can be up to 100 percent of the uncollected amounts.

As with failing to make deposits in a timely manner, under-withholding and failing to match amounts creates a personal risk to individuals with a responsibility for getting the correct sums of money to the government on time.

As with failing to make deposits in a timely manner, under-withholding and failing to match amounts creates a personal risk to individuals with a responsibility for getting the correct sums of money to the government on time.

Failing to pay — or under-paying — state and federal unemployment taxes

The greatest portion of unemployment insurance (UI) taxes is levied by the state. And state-levied penalties vary. Since state UI funds are being exhausted in this period of high unemployment, states are aggressive in collection efforts.

Garnishing wages incorrectly

Federal and state laws obligate employers to accurately withhold from employee pay, and remit, court-ordered garnishments, levies, and child support.

Violating these laws can result in penalties, depending on state laws. Also, federal law limits the amount of earnings that can be garnished, and protects employees from being terminated from their jobs because of a first-time garnishment.

A violation can mean reinstatement of a discharged employee, payment of back wages, and restoration of improperly garnished amounts. Employers who willfully violate the discharge provisions of the law can be prosecuted criminally and fined up to $1,000, imprisoned for not more than one year — or both.

Making unauthorized deductions

Employers can legally deduct from an employee’s pay only amounts authorized or required by law (such as tax withholding), by court order (such as garnishments), and amounts authorized by the employee (such as the employee’s share of health insurance).

As with failing to make deposits in a timely manner, under-withholding and failing to match amounts creates a personal risk to individuals with a responsibility for getting the correct sums of money to the government on time.

What are unauthorized deductions? State laws vary and it can be tricky. In addition, federal wage and hour law requires payment of agreed upon and earned wages (with the allowed deductions listed above).

Do you ever feel compelled to dock an employee’s pay if he or she breaks or damages company products or equipment? Check first with your attorney to see if this is permitted by your state law — even with the employee’s permission.

Failing to include awards, bonuses, and fringe benefits (when required) in employees’ taxable incomes

This action then results in the failure to withhold sufficient amounts from the total reportable income and not reporting the total reportable income to the Internal Revenue Service.

The risk: The employer is subject to under-reporting penalties of up to 15 percent of the under-withheld and under-deposited taxes. If the failure is willful, the penalties can be up to 100 percent. And the employer could also be subject to information return penalties for incorrect W-2 forms (as much as $50 for each incorrect W-2).

Using incorrect or bogus Social Security numbers for employees on their W-2 Forms and failing to accurately complete I-9 Forms

The risk: The employer can be subject to information return penalties for incorrect W-2 Forms, of up to $50 for each incorrect W-2. This mistake or failure by the employer also creates issues for the employees involved because they aren’t receiving proper earnings credits through the Social Security Administration.

Neglecting to pay at least the higher of the federal or state minimum wage to non-exempt employees as well as overtime in any seven-day workweek in which they work more than 40 hours

If this error is discovered, the employer is required to compensate the employee for back pay, plus fines and penalties. In addition to the fines and penalties imposed by the Department of Labor, the employer likely will be subject to federal and state wage and hour audits and owe additional amounts.

Not preparing and filing W-2 forms and not sending them to employees

The employer can be subject to information return penalties for incorrect W-2 forms, penalties of up to $100 for each incorrect or unreported W-2. For intentional failure, the penalties can go as high as $200 for each incorrect statement.

Ignoring state laws

It’s not just the federal wage and hour rules that employers must comply with. Employers need to be aware of, and comply with, the laws in the states where they have employees.