How to avoid common payroll mistakes and errors
Eliminating common mistakes for a smooth payroll process at your business
Business owners, no matter the size of the company, must manage complex calculations, regulations, and processes related to payroll. Payroll is the process of distributing wages owed to company employees while also calculating taxes, benefits, withholdings, and other aspects of payroll to workers at a company. For small business owners, it is even more important to understand and develop a payroll system so that there are no gaps in record keeping and all tax laws are correctly followed.
This article will outline common mistakes made during payroll and how your business can avoid these mistakes in the future.
What happens if you make a mistake while processing payroll?
Payroll mistakes can be financially and logistically disruptive to a business and their overall operations. When payroll mistakes occur, it is essential to issue payroll corrections as quickly as possible. Payroll corrections help rectify issues with any miscalculations. Considering this, employees overseeing payroll processing should always double-check any calculations made, whether made manually or through automated software.
Companies can sometimes face financial penalties, or worse, lawsuits or ongoing audits for lack of compliance. When a company is found to have made ongoing or repetitive payroll errors, there could be an investigation by the Internal Revenue Service (IRS) or Department of Labor (DOL). Moreover, workforce morale could decrease when employees encounter incorrect overtime wages, misclassification of their employee type, or other common payroll errors. If employees can't trust the payroll process, this may hinder their own productivity and contributions to the workplace.
Next, let’s look at the most common payroll mistakes and errors.
Top payroll mistakes and payroll errors
While payroll mistakes and errors come in many forms, there are more frequent errors to be mindful of when establishing a payroll process at your company. The five most common payroll mistakes are outlined below.
- Classifying employees incorrectly. Accurate payroll begins with the correct identification of your employees’ classifications. If, for example, you identify an employee as an independent contractor when they are functioning as an employee, fines or penalties may occur. Independent contractors do not have to be paid a minimum wage, are not subject to overtime wages, and do not have employment taxes withheld from their paychecks. Employees are the exact opposite and thus payment will look very different for each employee type. In addition to independent contractor or employee designation, business owners also need to be aware of the differences with non-exempt and exempt employee types. Whether an employee is exempt or not determines if overtime wages are paid. Misclassifying employees can lead to costly fines and employee disgruntlement.
- Miscalculating regular and overtime pay. As discussed, payroll involves complex calculations with specific rates paid out for certain employees. If an employee is non-exempt and works overtime, they are entitled to 1.5 times their regular rate of pay for any overtime hours worked. Overpayment or inaccurate calculations can easily occur when rates are mixed up. An employee's paycheck may have an inaccurate display of hours worked, and so when going through the payroll process, it's necessary to double-check hours worked with rates so that the paycheck reflects the true wages owed to the employee.
- Applying incorrect tax rates. Tax rates involve many types and levels, including federal income tax, social security tax, medicare tax, federal unemployment tax, and state income tax. Tax rates change relatively frequently and so a common mistake occurs when an employer uses old tax rates that are no longer the regulatory standard. Tax forms, like W-2 forms, need to be updated and regularly reviewed so that the business is always using the correct forms and rates for employee taxes. The IRS could fine companies that violate regulatory requirements with tax laws. In fact, in 2019, the IRS issued $13.7 billion in fines for companies that were not following payroll tax laws.
- Using incorrect payroll frequency. Some states have regulations around the frequency of payroll, although currently there is no federal regulation on how frequently employees should be paid. Business owners need to ensure that employees are getting paid timely and that the company is following current guidelines or regulations that dictate the frequency of issuing paychecks.
- Not maintaining payroll records. The IRS conducts audits to ensure that businesses are following the correct payroll protocols and that employee rights are protected and followed. As part of the auditing process, it is critical that employers maintain a robust system of documentation and recordkeeping. Records must be kept for all employees, including W-4 tax withholding forms, dates of all wages issued, and hours worked (for non-exempt employees). The Fair Labor Standards Act (FLSA) requires records be kept for three years. Payroll records should be kept securely, especially with sensitive information like social security numbers and other personal data.
Now that we’ve looked at some of the common errors, let’s next discuss how to avoid payroll errors.
How to avoid payroll errors
The best strategy to avoid common payroll mistakes is to have a compliance-forward process with transparency and clarity for all employees. The strategies below will help your company avoid payroll errors and ensure that payroll processing is a smooth, reliable process.
- Implement a cohesive process that all employees understand and utilize. The first step in preventing mistakes is to understand what the common mistakes are and how you can implement a process that proactively prevents these mistakes from occurring. From all parts of the process (clocking in, time tracking, wage calculations, etc.), employees should know the expectations of the process and who is responsible for what. Business owners can gather a large amount of needed data at the start of an employee's job. Through the use of employee self-onboarding software, employees can provide necessary information with the ability to update so that accuracy is ensured. Onboarding is a great time to provide a foundation for what the employee can expect, and they will benefit from clear and efficient payroll processing.
- Businesses should consider implementing tools and technology to ease the complexities of payroll processing. The IRS and DOL provide tools that ensure the correct identification of employee types. Additionally, a company may consider investing in payroll software that can integrate with other business functions, such as time and attendance, tax software, etc. A payroll service can be another option to solidify ease and automation. Automating complex calculations, tax filings, and employee payments reduces human errors and will automatically apply the latest federal, state, and local taxes. Plus, payroll software often includes encryption so that all payroll data is safe and secure.
- Gain awareness and education around compliance and regulation requirements. Business owners may consider reviewing the FLSA for updated definitions of worker types and other relevant regulations that businesses are required to follow. Additionally, business owners can regularly check employee tax rates issued by government and local authorities to make sure their software and calculations are in agreement with legal changes at the local, state, and federal levels. Lastly, by educating yourself with employment laws, you as a business owner will benefit from this knowledge as well as receive a peace of mind that your business is processing payroll correctly.
- Use a reporting function before and after payroll is processed. If using a payroll service or a payroll software platform, it may be useful to run reports both before and after payroll is processed. Generating reports helps avoid mistakes because errors can either be caught before payroll is generated, or audited for accuracy once payments have been issued. Reports also provide business leaders with real-time payroll data that can guide informed business decisions.
- Increase security in payroll processing. Avoiding payroll mistakes and errors include reducing the vulnerability exposing employees’ payroll data. Plus, businesses can use multi-factor authentication when scheduling or reporting hours worked so that only the respective employee submitting the information, the employee’s supervisor, or HR can view the data.
Are you ready to prevent payroll errors and payroll mistakes at your company? Are you ready to apply mistake prevention strategies so that payroll becomes a smooth, efficient process at your business?
Heartland is ready to help.
Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.