8 Common Payroll Errors & How to Avoid Making Them
January 11, 2024
Payroll processing comprises elaborate steps, including determining employees' gross pay rates and calculating their tax withholdings. Given the demanding nature of managing payroll, committing payroll errors every now and then is not uncommon.
Addressing and resolving payroll mistakes promptly is a must, especially if you want to implement a more effective payroll management system and maintain the trust of your employees.
That said, our payroll experts have prepared some of the best practices to minimize the most common payroll errors and boost your company’s efficiency.
- Some of the most common payroll errors include miscalculating salaries, misclassifying employees, inefficiently tracking work hours, overlooking benefits, missing payroll deadlines, and using the wrong tax forms.
- Employers who fail to address and regulate payroll errors in their company may face penalties and lawsuits from their employees, the IRS, FLSA, and their state labor office.
- Providing sufficient training for HR and payroll personnel, keeping up with payroll regulations, using a pay stub generator or a payroll checklist, and following a payroll calendar are effective practices for minimizing payroll errors.
8 Common Payroll Errors
The best way to properly correct and prevent the most common payroll errors starts with identifying these mistakes.
Some of the most frequently encountered payroll processing oversights include:
#1. Miscalculating the Salary
Payroll underpayment and payroll overpayment are both examples of miscalculated salaries.
Discrepancies in determining employees’ salaries are among the most crucial errors in payroll processing.
When employees are underpaid, it leads to dissatisfaction and frustration on the part of employees and an additional workload for the accounting and payroll personnel.
Overpaying employees affects the company’s expenses and accruals. The payroll department must adjust the company’s accounting books and the employee’s next pay to make up for the error.
#2. Misclassifying the Employees
Misclassifying employees is a type of payroll error that could lead to several IRS and FLSA violations and corresponding penalties.
Examples of misclassifying employees include:
Non-exempt vs. Exempt employees
Correctly identifying non-exempt from exempt employees ensures employers grant overtime compensation to the workers or staff who are genuinely entitled to it.
This type of mistake often occurs when HR or payroll personnel lack knowledge about distinguishing which employees qualify for overtime pay and minimum wage rates.
When not addressed and corrected promptly, employers could face lawsuits, penalties, an IRS audit, and even compensation for all employees whose wages and salaries were affected by the mix-up.
W-2 Employees vs. Independent Contractors
Misclassifying non-exempt employees as exempt employees, and vice versa, spells as much potential legal trouble for employers as confusing W-2 or regular employees with workers hired as independent contractors.
The IRS requires specific tax forms for employers to use when reporting all income paid to independent contractors and regular employees. As such, using incorrect IRS forms to file one’s taxes or report one's income unnecessarily prolongs the tax filing process and creates trouble for the employee and the contractor.
#3. Missing Payroll Deadlines
An integral part of successful payroll management includes consistently meeting all payroll deadlines. These deadlines ensure compliance with IRS regulations and that the company continues to respect employee labor rights.
It is also worth noting that several states across the U.S. follow specific payday requirements or the frequency at which employers disburse employees’ salaries.
Should a company’s payroll department fail to finalize and submit all payroll requirements on time, then the employer will likely miss the deadlines for their state’s required pay frequency and all other essential deadlines set by the company and the IRS.
There is minimal leeway for employers to amend any discrepancies in calculating employees’ salaries, tax withholdings, and deductions.
#4. Not Keeping Complete Payroll Records
Keeping complete payroll records is a must for small businesses and large corporations, especially in the event of employees raising specific payroll issues after the fact.
For instance, an employee may claim they were underpaid for a particular period, or a former staff member may contact Human Resources to seek copies of their last pay stubs.
Companies need all the necessary payroll records for each of their employees—from their employment contracts to their IRS forms to other documents essential to their nature of work and employment status.
#5. Overlooking Benefits
Fulfilling employee benefits such as offering coverage for health insurance and retirement plans, paid time off, overtime compensation, paid holidays, and employee discounts boosts employee satisfaction and morale.
In contrast, overlooking any of the benefits enumerated above leaves employees distrusting their employer and the company policies tied to them.
For instance, if an employee uses their paid time off to take a few days off, their next pay stub should display the number of hours used from their PTO, along with the remaining balance left on their paid leaves.
Otherwise, an unaccounted employee PTO could mean they are not compensated for their paid time off, even though they worked hard to earn it.
Similarly, failing to apply overtime pay or the correct deductions for insurance coverage leaves employees disappointed and unhappy.
#6. Using the Wrong Tax Rates
The IRS has set specific tax brackets to help employers determine the correct tax rates to implement based on each of their employees’ salaries. The tax brackets are also based on the employees’ filing status, whether single, married, filing separately or jointly, or widowed.
Tax rates also encompass whether an employee has declared dependents and qualifies for specific tax exemptions.
Let’s say a company’s payroll department applies a higher tax rate to employees with dependents who fall under a lower tax bracket.
The employer then ends up withholding a more significant percentage of the employee’s salary, leaving the employee with a smaller disposable income.
#7. Inefficient Time Tracking of Employees
A reliable time tracking system is crucial in monitoring which employees qualify for overtime compensation, PTO, vacation leave, and other salary adjustments.
Without a reliable system to monitor employees’ work hours, it would be impossible to accurately determine their correct wages for each pay period.
Time tracking employees’ work hours also proves instrumental in creating a clear project plan to meet deliverables and measure individual and team performance in the workplace.
Most companies, particularly those involving office-based job roles, also require their staff to clock in and out of work using a biometrics system to verify that the employee showed up and performed their assigned tasks.
#8. Omitting Fringe Benefits
Fringe benefits are nontraditional compensation or benefits employees receive in exchange for performing a specific task. It is a separate form of pay excluded from employees’ regular income.
Fringe benefits include travel expenses, discounted meals, educational assistance, vision, dental, or health insurance, and using a company-owned car or vehicle.
All of these fringe benefits ensure the safety and convenience of employees while fulfilling their jobs. Failing to provide fringe benefits is a missed opportunity to boost employee satisfaction and ensure they are adequately protected and rewarded for a job well done.
5 Best Practices on How to Avoid Payroll Errors
The following best practices effectively avoid committing payroll mistakes and minimize the potential consequences of payroll errors.
Keep Up With Payroll Regulations
If you genuinely want to know how to fix payroll errors for good, then you should not just focus on identifying who is responsible for payroll errors in your team and then call it a day.
Instead, make it a point to stay up-to-date with the latest news and changes in federal and state-wide payroll regulations. Note any changes to the IRS regulations, tax brackets, or required tax forms.
Better yet, consult with your state’s labor office to ensure you continuously comply with all the applicable regulations for your workforce.
Use A Pay Stub Generator
Manually preparing employee paychecks every payday can be tedious, especially in a company that is gradually expanding its manpower.
Using online tools such as a pay stub generator reduces the workload for payroll personnel and typical payroll errors in calculating employees’ salaries and taxes.
Paystub.org offers a selection of pay stub templates to suit user preferences and a built-in calculator to automate accounting for taxes and other deductions. You can also preview each pay stub to double-check that all the inserted information is correct and accurate.
Furthermore, the paystubs created using our pay stub generator are available for download in PDF format, which is convenient for securely storing employee and payroll records.
Have A Payroll Checklist
An efficient HR department knows the importance of having a payroll checklist. A payroll checklist is a tool that enables both human resources and payroll personnel to track all the critical steps involved in regulating employee records and managing payroll efficiently.
Payroll checklists include checking all documents and forms essential to each employee’s employment status, tracking their work hours, benefits, and paid time off, updating their salary grade based on performance evaluations or recent promotions, and ensuring overall accuracy and compliance in implementing the company’s payroll process.
Set A Payroll Calendar
Following a payroll checklist goes hand in hand with setting up a payroll calendar to avoid missing any crucial payroll-related deadlines.
A payroll calendar enables you to take note of due dates so you stay on track with your company’s pay schedule, pay period, and tax deadlines.
Screen & Train Your HR & Payroll Staff Accordingly
When hiring employees to fill managerial positions in your Human Resources and payroll departments, thoroughly screen their qualifications and credentials. Look for a candidate with relevant background and experience in the field.
Alternatively, you can provide additional training and seminars to your existing staff to upgrade their knowledge and skills. Provide performance-based rewards and opportunities for promotion to motivate your employees to be consistently excellent at fulfilling their jobs.
If one or more employees commit any payroll errors discussed in this article, remain objective in addressing and resolving the mistake.
Payroll errors are often commonplace for many small businesses and large corporations alike.
Some of these payroll errors may be credited to human error or even to unexpected technical issues, mainly if the company uses payroll software to manage employee wages and records.
Regardless, employers must ensure that these mistakes are dealt with promptly and accordingly and that proper countermeasures are implemented to avoid repeating such oversights in the future.