Employers & Payroll Withholding Errors
Payroll withholding refers to mandatory deductions that employers are legally required to take out of employees' paychecks. Since the law mandates these types of deductions, erroneous withholding can impact both the employee and the employer. To ensure accurate withholding, an employer should comply with the administering agency's requirements.
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Withholding Types
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Payroll withholding includes deductions for federal income tax, Social Security tax, Medicare tax, state and local income tax, wage garnishments and child support withholding orders. In rare cases, unemployment and disability insurance withholdings apply. The Internal Revenue Service collects federal income tax and Social Security and Medicare taxes. The state revenue agency oversees state withholding laws. Wage garnishments initiated by creditors and for child support are not valid unless the court orders them. Legal entities, such as the IRS and the state revenue agency, do not need a court order to garnish wages.
System Errors
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Many employers use payroll software to process payroll. If the representative enters the employee's tax information, such as her W-4 or state withholding tax data, incorrectly into the system, it results in inaccurate withholding. Specifically, payroll software has the federal and state tax-withholding tables embedded in the system, but the outcome depends on the employee's inputted information. Payroll software also calculates wage garnishments based on inputted data, such as the percentage of disposable pay that needs to be withheld. If this information is entered incorrectly, the wrong amount of wages will be withheld.
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Provider Errors
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Some employers use a payroll service provider to process their payroll. The provider is located off-site and is responsible for withholding deductions from employees' paychecks. The supplier sends the employer paychecks, pay stubs and payroll reports by payday. If the provider made a withholding error, the employer might not know it until payday. The IRS considers using a payroll provider to be good business practice, but the agency also penalizes the employer for mistakes a third-party makes. Some states penalize the provider instead.
Manual Processing
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Some employers with small payrolls use a manual payroll system, which requires payroll-withholding calculation by hand. The likelihood of errors is substantial with this system, which is why it's recommended only if the payroll is small.
Effects
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An employer is supposed to withhold taxes, plus pay them and file the necessary payroll tax reports with the IRS and the state revenue agency. Payroll withholding errors can result in erroneous payment and filing. The employer is also supposed to file employee W-2s with the Social Security Administration. The employee uses the W-2 to file his tax return. Erroneous tax-withholding can cause problems when the employee files his tax return. The administering agency can criminally investigate employers and refer them for prosecution if they violate withholding laws. The employer can also face monetary penalties from the federal or state government.
Solutions
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Using a reliable payroll service provider and double-checking the provider's work promptly can help the employer to avoid withholding problems. If the problem is detected early, it can be fixed quickly, which can prevent penalties. If the employer uses in-house software to process payroll, the representative should enter employees' withholding data correctly into the system.
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