What Are the Most Common Payroll Processing Mistakes to Avoid?

Proper payroll management means compensating your employees accurately, on time, and in accordance with all relevant legislation.

More importantly, though, employee payroll can be a war zone if not properly equipped and facilitated due to the many preventable errors that could detract from both your business and more crucially; your employee’s time/money. Check the four big payroll errors and how to stay away from them.

Correct pay is one of the most basic sets of expectations employees have along the employee lifecycle journey.

Yet, some external or internal forces can conspire to prevent accurate pay checks, W-2s, and associated payroll reports from being delivered. For error-free payroll that overtakes your employees’ expectations make sure you avoid these common errors:

Misclassifying employees

If an employee is misclassified, you will save any pay errors or being underpaid wages. Misclassification of the exemption from overtime for an employee is one of the most made mistakes.

Every employee must qualify for overtime pay if they work over 40 hours per week, according to the Fair Labor Standards Act (FLSA) unless exempt.

Beyond the penalties your company can face for misclassification of employees and failing to comply with FLSA regulations, you may also be preventing an employee from securing that much-warranted overtime income.

One of the most common payroll errors is an employee being wrongly classified as an independent contractor.

A misclassification error generally leads to the need for review of past payroll records, ultimately requiring retroactive compensation or other pay related changes Leave.

In fact, during 2019, the US Wage and Hour Division of the Department of Labor collected a record $322 million in back pay for misclassified employees. Misclassification not only erodes the trust that you have with your employees, but it is also going to cost your organization money.

Miscalculating pay

For an employee, it can be extremely frustrating to receive a paycheck with inaccurate details – especially if potential errors may result in missed payments. Miscalculations also take a long time to fix, as you will need to spend hours (or even days) researching and rectifying your mistakes outside of the standard payroll period.

An American Productivity & Quality Center (APQC) study shows that organizations take an average of 2-10 days to correct a payroll error. During the time it takes to correct those mistakes, employees may get irritated or they could stop paying their bills.

That is why you should do anything you can to avoid any payroll mistake, but at the very least, write that letter of incident if some form of employee payroll error occurs.

Miscalculations in Pay of salaried or hourly paid employees Top 5 Miscalculation Scenarios

• Overpaying or underpaying employees
• Making erroneous retroactive payments
• Missing the first paycheck for new hires
• Deducting the wrong amount for benefits or other payroll deductions
• Improperly paying employees who are on disability or other leaves

Ready to save time on payroll and deliver the perfect paycheck every time? Get the guide.

You might not track hours and overtime

Incorrectly logged hours of overtime, can result in incorrect payments on overtime, which in turn leads to corrections possibly spanning across multiple tax years Fixing those errors is time-consuming and very disruptive to employees, either because they have not been paid enough or because they were overpaid and now must find money to repay it.

When we say paying overtime, it refers to more than paying employees 1.5 times their regular rate of pay when their hours exceeds 40 hours a week. Errors in Overtime payment: If you are making periodic payments and they all get paid, no errors occur on any of the cases made.

• When employees are working through breaks
• Employees traveling between work sites
• When employees are asked to go in after hours, such as training, teambuilding or company parties

Failure to report all taxable forms of employee compensation

What workers take home includes more than their wages, overtime, commission, or bonuses. Besides the standard employee pay, you are obliged to report other taxable compensation types to the IRS.

• Stock options and similar awards
• Employee payouts; for example, payment via gift cards or travel Redistributions
• Personal use of a company car

While you may not view a small token of appreciation — like a gift or an award for an employee — as compensation, the IRS might see it as pay added onto your payroll.

Failure to report such other forms of compensation will expose your organization as well the employees whose tax is due, since it can attract penalties in filing taxes.

Incomplete or disorganized records

A disorganized and ineffective payroll process is a disaster waiting to happen. The paper processes, manual data entry or a slew of Excel spreadsheets creates opportunities for mistakes to go unnoticed for weeks or months. Poorly-managed records can also cause a missed payroll or neglect following up on important tasks.

In the same way, with a manual payroll system you rely entirely on one person to process all required actions for your payrolls. An unorganized, and timely payroll system is difficult to backfill a resource from your team when Payroll Manager goes on vacation or leaves the company. It also sets yourself up for issues in the case of an audit or process review.

Missing important deadlines

Employees anticipate on time, accurate pay every payroll cycle. Not closing a payroll cycle and paying late results in more work for employees. Not only that, but missing tax filing deadlines can also result in your organization having to pay penalties and may trigger certain regulatory actions.

Incorrect W-2s

Aside from a traditional paycheck, your staff will only receive one kind of payroll document from you the W-2 form.

W-2 Represents the employee gross and taxable income, it reports total payroll withholdings for benefits, 401k, health spending accounts. With W-2s being the annual tax form that employees use to file taxes, a single mistake can soon turn into a myriad of issues resulting in W-2 reissues, penalties and upset employees.