9 common payroll mistakes and how to avoid them
Managing payroll can be a complex affair that demands a lot of effort, documentation, and tracking. The ever-changing rules and guidelines have made the modern payroll management landscape more complicated than ever. As a result, errors arise that could result in delays in payments for employees, which may hurt businesses and prove costly for owners. To manage payroll processes more effectively, take a look at some common payroll mistakes and simple ways to avoid them.
- Misclassifying employees and contractors
Every business must carefully categorize its employees (as employees or independent contractors) to dock the right pay. Errors while doing this result in having to look through old payment records to make adjustments to employee pay. It could lead to dissent among the team and cost the business.
Moreover, according to the Fair Labor Standards Act (FLSA), all employees must get overtime pay for any hours worked over 40 hours per week unless they are explicitly classified as exempt. Making errors here could lead to FLSA-related fines for employers.
To manage this, hire reputed payroll service providers and avoid listing freelancers as employees. Only hire contractors and freelancers through leasing companies to avoid any penalties for misclassification.
- Making calculation errors
Making errors in payroll calculations can also cost businesses money and labor. These generally include overpaying or underpaying employees, making faulty retroactive payments, missing the first paycheck for new hires, deducting the wrong amount for benefits, etc. According to a study by the American Productivity & Quality Center, these errors take anywhere between two to ten days to be resolved. This can add to the team’s stress, as well as to the employee’s frustration. If this happens, ensure that an employee payroll error letter is sent with complete transparency regarding what happened and the measures taken to rectify the error.
To avoid this from happening, ensure that the HR managers and payroll management team are up to date with the current guidelines. Using a reputed payroll software may further help streamline the process.
- Failing to track employee hours and overtime
Incorrect logging of overtime hours could also result in issues with payroll management. It could snowball into corrections that span across multiple tax years. These issues may arise because of missed payments in the following scenarios-
- When employees work during break time
- When employees spend time traveling between work sites
- When the team is expected to participate in activities outside of work hours
One of the most effective ways to cope with this is to separate overtime pay from regular pay. Maintain strict adherence to overtime guidelines for the company to manage the process easily.
- Not reporting all taxable employee compensation
Compensation extends beyond money. Businesses must also report any taxable compensation to the IRS, such as stock options, equity awards, employee rewards such as gift cards, personal use of company cars, etc. While these may not be perceived as compensation, they make up a significant part of one’s payroll. Failure to report these could result in heavy tax penalties.
- Having incomplete or disorganized records
Businesses must properly maintain and organize their payroll records. Errors here could result in missed employee payments, delayed action on urgent tasks, etc.
Instead of relying on manual data entry and paper processes, use an automated payroll system for better efficiency. Modern payroll systems are equipped to automate calculations, tax deductions, and generate payslips. These can be integrated into one’s accounting system to ensure tax compliance and make reporting easier.
- Missing deadlines
All employees expect timely payment of salaries and benefits. It helps them stay up to date with their bills and other payments. Missing these deadlines or making late payments could spell trouble for one’s team.
Businesses must also follow strict deadlines when filing taxes and returns. Overlooking these deadlines could lead to late filing fees and regulatory penalties. To avoid this, set up a payroll calendar with reminders for important deadlines such as payroll processing, submission of tax forms, remitting tax forms, filing reports, etc.
- Sending incorrect W-2s
A W-2 is one of the two payroll documents that employees receive from the company. It contains details regarding the employee’s gross and taxable wages, payroll withholdings for benefits, health spending accounts, and 401k. Employees use this document to file their taxes. Mistakes made in this document could lead to significant delays, reissues, and penalties. Therefore, special attention must be paid to these documents so the tax filing process can seamlessly happen.
- Having an inadequate backup system
In today’s business environment, data is everything. Companies must have access to all data, even during a system crash or employee resignation. All companies must keep a payroll data backup using cloud-based or traditional payroll management systems. Records used for pay computation, such as timecards, work and time schedules, and other records, must be kept for two years. Having multiple back-ups of the same can reduce the risk of data loss. Please note that some states also have specific record-keeping requirements that businesses must adhere to.
- Non-compliance with wage garnishment
The Department of Labor has certain strict rules regarding wage garnishment. According to this procedure, court orders may mandate employers to withhold a person’s earnings for the payment of certain debts such as child support. Compliance with this rule can vary by state and debt, so businesses must pay special attention to these guidelines. Here, the employer is held responsible for calculating the garnishment amount, withholding it, and forwarding the money to the relevant agencies. Discrepancies in doing so could bring on penalties for the employer.
To ensure compliance, companies must stay updated with payroll and garnishment guidelines, use reliable payroll software, train their payroll staff, and double-check all calculations.
