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The Most Common Mistakes in Payroll and How to Fix Them

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Payroll management in businesses
Effective payroll administration entails ensuring that your employees are paid correctly, on schedule, and in accordance with applicable laws. Employee payroll can be a minefield of errors that can cost employees—and your company—time and money if not handled correctly.

Payroll is one of the most underappreciated, yet crucial, functions in a business.

When done correctly, payroll can help your organization avoid legal ramifications while also keeping your employees happy. However, when done incorrectly, payroll errors gain momentum. They spread throughout the company, and can become costly to correct, both in terms of time spent and money lost.

On the plus side, most common payroll mistakes are simple to navigate, fix, or avoid with proper planning. Let’s look at the most common payroll mistakes and how to avoid them.

Top 5 Mistakes in Payroll Management

Employee contentment

An employer who pays an employee the wrong amount, is late in issuing payments, or incorrectly deducts taxes will frustrate and worry the employee. Unsatisfied employees are constantly concerned about whether or not their paycheck will be delivered on time or in the correct amount. 

During tax season, an employee must pay for miscalculated taxes out of pocket, and the employer must do the same with additional penalties. Employees who are dissatisfied will not work hard to impress you. They might leave your start-up in droves, and will write negative reviews about your company.

Pay miscalculation

An incorrect paycheck can be aggravating for any employee, especially if it results in missed payments. Miscalculations also waste time because you’ll have to devote hours, if not days, to investigating and correcting errors outside of the normal payroll cycle.

According to a study conducted by the American Productivity & Quality Center (APQC), organizations take between two and ten days to resolve a payroll error. Employees may become frustrated or even unable to pay their bills during the time it takes to correct those errors.

Miscalculations in pay can occur with both salaried and hourly employees. The following are examples of common miscalculation scenarios:

  • Employee overpayment or underpayment
  • Making incorrect retroactive payments 
  • New hires missing their first payday
  • Incorrectly deducting benefits or other payroll deductions
  • Paying employees who are on disability or other leaves incorrectly

Employee hours and overtime are not tracked

Incorrectly documented overtime hours might result in inaccurate overtime payments, which may necessitate repairs spanning numerous tax years. Correcting those errors takes time and can be quite upsetting for employees. This is regardless of whether they are underpaid or overpaid and must return money to the employer.

Overtime pay is more than just paying employees the typical 1.5 times their regular pay rate when they work more than 40 hours per week. Overtime payment mistakes can occur if you fail to make a payment in any of the following situations: 

  • When employees work during their breaks
  • When employees spend time commuting between work locations
  • When employees are compelled to participate in events outside of usual business hours, such as training, team building, or company parties.

Failure to report all types of taxable employee compensation

Employee compensation consists of more than just salary, overtime, commissions, and bonuses. In addition to reporting traditional forms of employee pay, you must also report to the IRS other forms of taxable compensation, such as:

  • Stock options and other forms of equity compensation
  • Employee incentives, such as gift cards or trip awards
  • Use of a company vehicle for personal purposes

A small gift or award to an employee may not appear to be compensation, but the IRS may consider it to be payroll. Non-reporting of these various forms of pay may result in tax filing fines for your company and the employees impacted.

Failure to meet critical deadlines

Each payroll cycle, employees expect to be paid on time and accurately. You can cause more problems for employees if you miss the end of a payroll cycle and make late payments. In addition, if you miss tax filing deadlines, your organization may face late filing fees as well as regulatory penalties.

How to Avoid Mistakes and Improve Payroll Management

You may avoid the most common payroll problems by using resources and technologies to automate payroll procedures and stay in compliance with legal standards. Take the following steps to reduce errors and improve the overall efficiency of your payroll management program:

Establish explicit payroll policies. 

Create a document that details all of your payroll actions. This includes payroll exceptions that are created and the procedures for reviewing and approving modifications. In addition, you should develop a policy for record management and retention. This helps you meet legal requirements, such as the Fair Labor Standards Act’s (FLSA’s) mandate to keep payroll records for up to three years.

Examine your present payroll service provider and practices.

A thorough examination of existing processes will assist you in identifying inefficiencies. If your company is encountering issues and needs a new approach to payroll management, you should think about switching payroll providers. As you determine your company’s payroll priorities, you may find a payroll partner who shares your objectives. And then take meticulous steps to ensure a smooth transition.

Payroll operations should be automated and integrated.

An integrated payroll system automates payroll activities, allowing you to avoid error-prone human entry and paper-intensive processes. Furthermore, an integrated system aligns payroll activities. This includes time tracking, scheduling, and employee benefit elections. And allows you to manage the workforce and ensure consistency between payroll and HR data.

Related: 5 Best Accounting Software for E-commerce Businesses

Create a comprehensive payroll calendar and checklist for weekly and monthly activities.

Having a clear process in place for paydays, sending W-2s, and satisfying payroll tax responsibilities allows you to prevent missed deadlines and late filing penalties. By using a payroll calendar throughout the year, you’ll always know what’s coming up, and you’ll be able to better plan the time you spend on payroll.

Final Thoughts: Payroll Management for Business Owners

It is critical to stay on top of payroll management and payroll-related concerns. If you get this incorrectly, your company could suffer major penalties. The last thing you need is a lawsuit or unhappy employees who are concerned about their careers. So, to successfully scale your business, take action today by avoiding the most common payroll blunders mentioned above.

If you don’t know where to start in choosing or setting up a payroll management system, reach out to the tech-savvy accountants of Today CFO. We are equipped to assist you in all of your accounting needs, from automation to tax planning.

About The Author

Tom is the creator of the AIM Framework and Accounting Impact Method. He spends less time on fruitless theoretical methods, and most of his time bringing practical financial, tax, and technology solutions to business owners who want to make an impact on the world.

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