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Here’s How to Handle Some Common Payroll and Tax Mistakes

July 7, 2022, 8:46 AM

What would you do if you accidentally got paid more than 330 times your normal salary?

That was the question facing a Chilean worker last month. The unnamed worker got a check from his employer, Consorcio Industrial de Alimentos, worth 165,398,851 Chilean pesos—or just under $175,000 US—direct-deposited into his account. His regular take-home pay was about 500,000 Chilean pesos—about $525 US.

When he called attention to the error, the company’s HR department told him to return the money. Instead, he submitted a letter of resignation and disappeared.

The company has since filed a complaint against the worker.

Of course, not all payroll mistakes are quite so dramatic, but you should pay close attention on payday nonetheless. Here are some common payroll and tax mistakes—and how to fix them.

You didn’t get paid as much in cash as promised.

I probably get more complaints about being paid in cash than any other payroll questions. It’s important to note that getting paid in cash isn’t illegal. You can be paid in dollar bills, by check, or by Bitcoin.

The method of payment isn’t typically the problem. What tends to be a problem is cash payments are often synonymous with being paid off the books. What that means is that there’s no official record of your employment. That opens the possibility of a difference between how much money you actually received and how much your employer claims to have paid you.

Resolving a dispute of this sort can be difficult. The best plan is to make sure you keep excellent records to back up your claims. Remember: Even if you’re paid off the books, you still have a tax filing and payment obligation.

Your paycheck looks ‘off.’

There’s a lot to consider when calculating your paycheck. Some employees are paid hourly, some are paid a weekly rate, and others might be paid based on sales commissions, tips, and other incentives. Add in overtime, company holidays, paid time off, and more, and figuring out how much you should actually be paid can be confusing.

Under-reporting can be problematic, but I’ve also seen instances where reimbursements and other tax-free payments were misreported as taxable income. The key is to pay the right amount of tax—not less, not more.

As before, the best advice is to keep excellent records. Check with your company’s benefits department to verify policies for time off and overtime, which can vary by location.

Many companies have online time trackers that you can use to compare your records against the company’s records. I recommend regularly checking—especially if your compensation is tricky—and immediately notifying the company if there’s a discrepancy. There might be time restrictions, and state laws might differ when it comes to reporting and making corrections. If a dispute isn’t easily resolved, you may need to escalate a claim to your state’s department of labor.

Your paycheck doesn’t properly reflect elections.

Pay attention to the elections you make at the beginning of your employment—or in some cases, at the beginning of the year—and make sure those line up with what’s being reported on your check and your Form W-2. That not only includes Form W-4 elections such as extra withholding, but benefits.

If benefits were touted as tax-favored, make sure the appropriate boxes reflect those choices, including deferred compensation. Pay attention also to benefit-related transactions during the year to avoid being blindsided when tax forms reflect moves such as cashless stock option purchases.

If you notice any discrepancies, notify your HR or payroll department immediately.

Your withholding isn’t what you expected.

It’s critical to pay attention to your withholding during the year—doing a withholding check-up now is a good idea. Don’t just look at the numbers when you’re checking your withholding. Make sure—especially in a more remote and hybrid world—that you account for geography.

I learned this the hard way. When I was a newly minted attorney, I lived in Philadelphia but worked in New Jersey. My employer knew where I lived, but somehow that never translated to my pay. I didn’t think to check since I had properly filled out my payroll forms. That is, until I got a sizable bill from the City of Philadelphia demanding a whopping 4.6135% plus interest and penalty. I was able to get the penalties waived, and my paycheck was fixed moving forward, but it was a good lesson.

If you notice an error, request that it be corrected immediately. If you’re subject to penalty, consider asking for an abatement—your employer should be happy to provide you with documentation. Be aware interest is typically statutory and isn’t likely to be abated. If the error was on the employer’s side, they might be willing to gross up your pay to help mitigate the difference. Just be aware that a gross up is subject to tax.

You didn’t get a tax form.

If you didn’t receive your Form W-2 or Form 1099-NEC by the due date, contact your employer. You might not have received the form because of an incomplete or wrong address. Or maybe your form got lost in the mail. If that’s the case, your employer can send out another form: problem solved.

If you have no luck contacting your employer, try calling the IRS at 1-800-829-1040. You’ll want to have your dates of employment available together with an estimate of your earnings and withholding. You can find this information on your last pay stub. You’ll also need your employer’s name, address, and phone number.

The IRS will contact your employer and request the missing form. The IRS also will send you a Form 4852. Typically, if you don’t receive your missing form in time to file your return, you can use Form 4852 as a substitute. Even if you don’t receive a tax form, you still need to report your income.

Your tax form is wrong.

If your employer sends you a tax form that’s wrong, don’t ignore the error. The IRS matches forms with return and will send you a notice if the information doesn’t match. You don’t want your tax return to be subject to scrutiny if you can help it, so it’s better to have a form that matches what you’re reporting. To correct an erroneous form, you’ll use the same procedure as you would for a missing form (see above).

You got an unexpected tax form.

I get questions about unexpected tax forms every year. Usually, this happens when an employer promises to pay under the table and later finds a legal or tax advantage to reporting. The result is a form, typically a Form 1099-NEC, documenting the pay that pops up at tax time.

Arguing about the form won’t do you any good. Since you are required to report the income—form in hand or not—my advice is to verify the information is accurate and file your return.

You were misclassified.

For most workers, the question of independent contractor versus employee is settled before work begins. If there are questions about classification from the start, or if your arrangement changes over time, you might be surprised to see a Form W-2 in the mail when you expected a Form 1099-NEC—or vice versa.

If you’re not sure about your status, you can find a comparison of employees and independent contractor characteristics on the Department of Labor’s website. The IRS also offers Pub 1779 with similar information.

If you believe you have been misclassified, you can report it to the IRS using Form SS-8. The IRS will review the form and investigate. However, Form SS-8 doesn’t relieve you of the obligation to timely file a return, so don’t put off filing your return while waiting for a response.

It’s also worth noting Form SS-8 is used for actual misclassification questions. The IRS does not typically answer potential work scenarios or hypotheticals—those “What ifs?”

Conclusion

Figuring out how to correctly calculate payroll can be tricky for workers, employers, and their advisers. I recommend businesses of all sizes consider a payroll company to avoid snafus. Taxpayers also should regularly check their paychecks and withholding—and work with a tax professional—to avoid surprises at tax time.

This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com

To contact the editors responsible for this story: Patrick Ambrosio at PAmbrosio@bloombergindustry.com; Butch Maier at bmaier@bloombergindustry.com