7 Most Common Payroll Errors – Prevention Tips
Payroll errors do not only waste time. They also contribute to job dissatisfaction and increase the risk of non-compliance with overtime and withholding regulations. Here, we share the seven most common payroll errors with tips to avoid costly mistakes and streamline your payroll process.
Why Payroll Accuracy is Important
Although payroll errors are common, they are completely avoidable. Accuracy is essential to all organizations as it helps avoid serious issues, including:
- Non-compliance: Legal compliance ensures your organization is not charged penalties and fines related to federal and state withholding laws and inaccurate reporting. However, it also avoids legal action related to insufficient employee compensation.
- Employee dissatisfaction: Not being paid on time, along with paychecks riddled with errors and inaccuracies, contributes to employee dissatisfaction. Errors can build distrust and frustration when employees constantly have to dispute their pay. This impacts employee morale, contributes to higher employee churn, and costs you money related to replacing talent.
- Financial issues: When payroll is managed properly, overtime and taxes are paid in manageable amounts and accounted for in your budget. This helps avoid payroll-related cash flow and financial planning issues. Constant payroll errors can lead to large sum payouts to the government and employees. Outstanding overtime, in conjunction with improper withholding amounts, adds up, creating unexpected costs not accounted for in your budget.
The Cost of Payroll Errors
There are both financial and non-financial costs associated with payroll mistakes, including:
- Time and labor expenses: Every payroll error caught must be corrected, which adds unnecessary time and labor expenses to your payroll budget.
- Employee dissatisfaction and mistrust: The cost of employee dissatisfaction can never be underestimated. The loss of top talent is the loss of legacy knowledge that you can never regain. You also have financial costs to replace lost employees including advertising, recruitment, onboarding, and training. High turnover also negatively impacts productivity with constant disruptions to workflows and poor morale.
- Legal penalties and compliance issues: Payroll/employment tax penalties are levied against employers who don’t fulfill their tax responsibilities. Fines start at 2% for late payments of 1 to 5 days, increasing to 15% for 10 days following an IRS notice.
Top 7 Most Common Payroll Errors
That brings us to the seven most common payroll errors and how to avoid them.
- Incorrect employee data entry (e.g., classifying contractors as W2s)
Manual data entry is the bane of any payroll department’s existence. It is far too easy to make errors not just from a typo standpoint but also errors such as classifying contract workers as W2s by checking the wrong box. Every data entry error made creates a world of issues that must be backtracked, corrected, and reentered.
- Missed or late payments
Late filing of taxes incurs penalties and should be avoided at all costs. Wage payments must be reported to the IRS, including related employment taxes, income tax withholding, social security tax, Medicare tax and, if applicable, Additional Medicare tax by filing the Employer’s Quarterly Federal Tax Return. All employment taxes, including FUTA, must be deposited on time using the required method.You also have to file form W-2s at the end of the year for each employee. Keeping track of all these forms and payments can be confusing, including forms filed quarterly with due dates of April 30, July 31, October 31, and January 31 and annual filings that can be due either January 31 or February 28.
- Calculation errors in overtime or bonuses
Whether it is related to incorrectly logged overtime hours, miscalculations, or a misunderstanding of proper compensation, errors in overtime and bonuses can have a major financial impact. Errors not caught soon enough can span years.Common log errors often mistakenly omitted might include working during break times, times traveling between worksites, or participating in work-related activities outside an employee’s usual work hours. If you employ contract and full-time workers, you might also inadvertently treat a full-time employee as exempt when they are not.
- Failure to deduct or withhold taxes accurately
Employee pay includes salary, overtime, commissions, and bonuses. This can lead to errors related to not deducting or withholding the right amount of taxes. However, not keeping up with the latest tax laws can also lead to this type of error.
- Improper classification of employees
Improper classification of employees removes their core rights and protections. As a result, it is critical to ensure each employee is classified correctly based on whether they are full-time employees or independent contractors. Failure to do so can lead to criminal charges. Proper classification ensures employees receive all they are entitled to under labor laws, including minimum wage, overtime, and workers’ compensation. It also ensures that proper employer contributions are made to social security and unemployment.
- Ignoring compliance regulations
Payroll compliance applies to federal, local, and state regulations. Failing to understand and remain informed of current tax regulations as they apply to withholding, reporting, or depositing are common reasons for penalties and audits related to non-compliance.
- Inadequate record-keeping
Accurate records avoid inefficiencies that lead to payroll mistakes. You are also required by law to keep payroll records for at least three years, including:
- Hours worked
- Payroll dates
- Names, addresses and social security numbers
However, different states have different record-keeping requirements, which can add to the confusion.
Best Practices for Avoiding Payroll Mistakes
There are several steps you can take to avoid payroll mistakes, including:
- Using a robust payroll software with built-in error checks and professional input from accountants
- Double checking data entry and calculations before submitting taxes or sending out pay to employees
- Keeping up to date on federal, local, and state tax laws and compliance regulations
- Using an HR/payroll software to maintain accurate employee records
- Conducting regular internal payroll audits and reviews
- Providing ongoing training for payroll staff
- Considering outsourcing payroll to experts if your team is not equipped to do so correctly
- Implementing an automated time and attendance platform to improve overtime accuracy
Paypro offers comprehensive software that integrates your HR record keeping, time tracking, and payroll software. Annual updates reflect current tax laws, while automatic monitoring helps catch errors before your filings are submitted.
Our team of tax experts provides step-by-step assistance to simplify the process for timely, accurate tax filing every pay cycle while providing IRS-authorized software designed for error-free direct e-filing. Click here for more information or to set up a free demo today.
About the Author
Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.