6 common payroll errors and how to avoid them
The payroll process is often considered high risk for any business, especially if the right tools and resources are not used. Besides, businesses must comply with tax regulations and laws, which can further complicate the payroll process. Thus, errors may sometimes creep in. However, this can be distressing for employees and expensive for the business. To steer clear of these problems, it helps to learn about the common payroll errors and how to avoid them.
Wrong classification of employees
This payroll blunder has been committed by small as well as large businesses. Sometimes, they end up misclassifying an employee, leading to major errors in their payroll. For example, a person is classified as an independent contractor instead of permanent employee, or they may not be classified to receive overtime, when in fact they are. Such misclassification can easily lead to serious payroll errors. The solution to avoid this is to use an automated payroll service or software instead of manually completing the process.
Miscalculation of payroll
Another common error that has been observed is miscalculating the payroll. This mainly occurs due to the misclassification of employees. Aside from this, there are other reasons why miscalculation may happen.
Overpaying or underpaying employees.
Making retroactive payments by mistake.
Not paying the first paycheck for new hires.
Deducting the wrong amount for benefits or other miscellaneous payroll deductions.
Incorrectly paying employees who are on disability or other leaves.
Whatever might be the reason for the miscalculation, it can cause a lot of frustration for the employees, especially when it involves missed payment. Subsequently, the business has to dedicate several hours or even days to look into why the error occurred and then correct it. Most of the time, miscalculation errors are avoidable when a business uses automated online tools. Yet, if errors do occur, a business needs to take the necessary steps to rectify it and send a payroll error email or letter to the employee explaining why the error happened and how it is being resolved.
Miscalculating or not paying overtime
Sometimes, overtime hours may be incorrectly logged. While this may seem like a problem that is easily resolved by correcting the logs, it can take several tax years to correct the errors. Most of the time, overtime pay errors occur in the following situations:
An employee works during break times but the extra work time is not logged in.
Employees travel between work sites, yet the work time is not logged in.
No time is logged in for participating in activities that goes beyond normal work hours, such as for training, team building, and so on.
This error can be avoided by having a system in place that gives employees the flexibility to modify their overtime with due diligence. This will not only save time and extra expenses for the business but will also avoid causing distress for the employees.
Failing to report all taxable compensations of an employee
Most businesses may have a pay structure that has more components than just salary, commissions, overtime, and bonuses. But sometimes, there may be additional taxable components. These may include one or several of the following.
Stock options and other equity awards
Employee rewards such as gift cards or travel awards
Personal use of a company car
This extra compensation may not show up in the payroll. Yet, it is legally mandatory for a business to show these additional components to the IRS. Even a small award or gift may be considered as part of the payroll by the IRS, even if the business does not view it as such. If all of these are not reported, the business as well as the employee will face some hefty tax filing penalties and fines. This can be easily avoided if the business keeps track of the tax laws and latest regulatory updates.
Missing out on crucial deadlines
Employee productivity and satisfaction can go down if the business does not give out the correct paycheck on time during each payroll cycle. Missed payments and late payments can create a lot of problems for employees, especially for those who have to pay back mortgages and loans. Besides this, the business has to face late filing fees and regulatory penalties if they miss the tax filing deadlines. All of these can be easily avoided by having a detailed payroll calendar. In addition, businesses should develop a checklist for weekly and monthly payroll activities. This will streamline the payroll process ensuring no deadlines are missed.
Incomplete or disorganized records
A business may end up wasting a lot of time, money, and resources if the payroll records are disorganized or incomplete. Usually, this happens when the business is heavily dependent on paper process, spreadsheets, and manual data entry. The errors that creep in because of this can take over weeks and months just to be uncovered. Then, additional time and resources will have to be spent in investigating and correcting these errors. An effective way to prevent all these is to move away from traditional processes and use automated payroll systems. These are highly accurate, organized, and efficient in managing payroll processes for small as well as large businesses.
