I still cringe at a scene from the classic children's story, The Little House in the Big Woods, by Laura Ingalls Wilder. 

Maybe you read it as a child too. The panther leapt from tree to tree, chasing a horse and rider home from town. The rider made it to his porch and dove in the door just as the panther dropped on the bareback horse as it ran screaming into the night. 

Payroll issues are that panther and the horse is your business. 

The good news is, no one physically dies when the payroll panther strikes. But when riding through Payroll Forest, significant issues lurk everywhere. 

Today's article will help you build a defense by considering 5 common vulnerabilities: 

1. No payroll at all 

Many businesses launch with no employees. 

When the first part-timers start, they are deemed to be 1099 contractors. No payroll, no W-2s. It's the Easy Button. 

It's also a vulnerable path, especially as the workforce grows. Even if it doesn't grow, those early part-timers likely should be employees on payroll. 

Workers who are not on payroll expose your company to significant risk of fines and penalties. Even if you never get caught, the feeling of constantly skirting the law isn't a pleasant feeling. 

2. Work in multiple states 

Let’s say:

• Your team often travels to other states for work. 

• You have remote employees who live (and work) in other states.

• You have a big, out-of-state project that spans multiple years. 

As a general rule, your company should be registered as an employer (and withholding state taxes) in the states where work is performed. 

Maybe you're thinking, That's crazy, we've got employees all over. Are you saying we need to be registered in every state? 

That is what I mean by the payroll panther. It is hanging from every tree.

Are there scores of businesses working in states where they aren't registered?  Sure. 

Are those businesses at risk of running afoul of payroll laws?  Absolutely. 

3. S Corp pays owner health insurance premiums

An S Corporation is technically not allowed to pay the health insurance premiums of a >2% owner. If the company does pay these premiums, they must be added to the owner's W-2 and treated as a salary.

Typically this transfer from insurance expense to W-2 wage expense is entered in the company's payroll system at the end of each year. 

Through many years of experience I've learned two things:

1. This process sometimes isn't done at all.

2. When it is done, it's often done incorrectly. For example, this wage add-on is not subject to Social Security and Medicare tax. It takes special care to make it come out that way. 

4. Personal use of company vehicles

This is perhaps the most pervasive payroll error across companies small and large. 

If a company vehicle is used by an employee personally, the value of the use must be added to that employee's W-2. 

Maybe you're thinking, We don't let our employees use work vehicles personally. They only use them for work and commuting. 

That is the problem: commuting is generally personal use. An employee who lives 25 miles from the office likely has 50 miles per day of personal use on a company vehicle. That is a taxable benefit. 

For more info on how to calculate the benefit, visit this post on BYO CFO:  The Best Tax Way to Handle Vehicles in a Business.

5. Non-payroll reimbursements or deductions

To be clear - there is nothing wrong with running miscellaneous reimbursements or deductions through payroll. 

Safety shoes, rent, cell phones, clothing, mileage, employee loans, vehicles sales - the list is endless - all can be additions or subtractions from an employee's check.

Here is the catch: these items are simply additions or deductions from the employee's net paycheck. They generally should not impact payroll in any way. 

However, it's common to see these items set up incorrectly. Whenever a new reimbursement or deduction is created, it must be carefully tested to make sure it's working properly.

If it isn't, thousands of dollars of wages and taxes may be calculating incorrectly. 

TLDR:

Due to its extreme complexity, payroll is an impending disaster. The following are particular risk factors: 

1. No payroll at all.

2. Work in multiple states. 

3. S Corp owner health insurance premiums.

4. Personal use of company vehicles.

5. Non-payroll reimbursements or deductions.