Payroll might seem like a routine back-office function, but one wrong move can have ripple effects across your business. Whether it’s a missed filing deadline or a misclassified contractor, even minor errors can trigger IRS penalties, employee dissatisfaction, or even a dreaded audit.
This is why working with a Nashville CPA firm can be one of the smartest financial decisions a Tennessee small business owner makes. With the help of an experienced CPA, small business owners can focus on doing what they do best while avoiding the headaches that come with costly payroll errors, such as:
1. Misclassifying Employees as Independent Contractors
This is one of the most frequent and expensive mistakes small business owners make. Classifying someone as a 1099 contractor when they function more like a W-2 employee can lead to back taxes, unpaid overtime, and hefty IRS penalties.
In Tennessee, the Department of Labor can also impose fines for misclassification, especially if unemployment insurance contributions were never paid. The IRS penalty for intentional misclassification includes up to 100% of the employer’s share of FICA taxes, plus interest.
2. Missing Payroll Tax Deadlines
Federal payroll taxes are due either monthly or semi-weekly depending on the size of your payroll. Missing these deadlines—even by a day—can lead to penalties which can range from 2% of the unpaid tax and increasing up to 15% the longer payment is delayed.
Even though Tennessee doesn’t levy a personal income tax, you’re still responsible for withholding and remitting federal income tax, Social Security, and Medicare. Forgetting to deposit taxes can flag your business for closer inspection by the IRS.
3. Failing to Maintain Proper Payroll Records
By federal law, you’re required to retain payroll records for at least three years. This includes hours worked, wages paid, and tax forms. Not keeping adequate documentation can make it impossible to defend yourself in the event of a dispute or audit.
In Tennessee, businesses are also subject to state audits for unemployment insurance, and lacking sufficient records can lead to reclassification or underpayment assessments.
4. Incorrect Overtime Calculations
Small businesses in Nashville that pay hourly employees sometimes miscalculate overtime, particularly when bonuses, commissions, or multiple pay rates are involved. This potentially opens the door to wage-and-hour claims.
While Tennessee follows the federal Fair Labor Standards Act (FLSA), which mandates time-and-a-half pay for hours worked over 40 per week, errors in how that rate is computed can lead to back pay liability and fines.
5. Improper Handling of Final Paychecks
When an employee leaves, whether voluntarily or through termination, mishandling their final paycheck can expose you to legal claims. Small business owners who handle payroll by themselves sometimes forget to account for unused PTO payouts, final bonuses, or benefit deductions, creating confusion or resentment.
Furthermore, in Tennessee, final paychecks must be issued no later than the next regular payday. Missing that deadline can result in penalties and erode trust with remaining staff.
Managing payroll doesn’t have to be a burden. By partnering with a Nashville CPA firm, small business owners in Tennessee can avoid these payroll pitfalls and maintain compliance year-round.
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