Payroll errors are more than an annoyance. They can be costly, cause compliance issues, hurt your credibility and diminish trust. And while mistakes are common, most are easily avoidable.
Easy to Make & Avoid Payroll Errors
Payroll processing is a vital business task. It required precision and meticulous attention to detail. If not, you run the risk of making these all-too-common payroll errors.
1. Inaccurate Employee Time Tracking
Accurately tracking your employees’ time is critical to maintaining compliance, employee trust, and your budget. Errors in time tracking can be due to a number of reasons from falsifying or inaccurately estimating time to data entry errors, outdated systems and lack of training. They can cause employees to be underpaid or overpaid as well as lead to fines, penalties, lawsuits and audits.
Tips for Avoiding: Automate your time clock and use reliable employee time tracking software.
2. Misclassifying Employees
Misclassifying employees can lead to costly payroll errors, legal issues and penalties. It happens when employees are incorrectly labeled as independent contractors or vice versa either by accident or so companies can try and save on taxes and benefits. The Fair Labor Standards Act gives employees certain rights based on employment status and misclassifying them may cause you to deny them wages and benefits they’re legally due. This will not only cause tax and accounting errors, but it could also put you at risk of labor law noncompliance.
Tips for Avoiding: Familiarize yourself with labor laws, perform regular classification audits, refer to IRS Form SS-8, and invest in a payroll software that allows different employee classifications.
3. Withholding the Wrong Amount of Tax
Tax form errors can cause all sorts of problems. They can result in the wrong amount of tax being withheld from an employee. Withhold too much and the employee will receive smaller paychecks and miss out on earning interest on this money. Withhold too little and they may end up owing the IRS. If the amount is significant, they could be facing underpayment penalties and interest charges. Not filling out or filing employee tax forms correctly can also impact your payroll taxes, causing compliance issues for your business as well as leaving you owing the IRS a lot of money.
Tips for Avoiding: Provide clear guidance on W-4 forms and options, stay up to date on tax laws, perform regular withholding audits and use a payroll system with integrated tax compliance features.
4. Incorrectly Calculating Overtime
Overtime calculations can be tricky especially if you have different pay rates, shift differentials, or non-discretionary bonuses to deal with but miscalculating or failing to pay overtime is a labor law violation. These types of mistakes can happen when you fail to track all hours worked, miscalculate the rate and split workweeks to avoid overtime and can lead to back pay, fines and other sanctions.
Tips for Avoiding: Familiarize yourself with the Fair Labor Standards Act (FLSA) overtime rules, use automated time-tracking and payroll systems and regularly review and update your overtime policies.
5. Poor Record Keeping
From timesheets and tax forms to benefits elections, there’s a lot that goes into payroll records, but accurate records are crucial if you want to avoid compliance issues and payroll disputes. When your records are a mess, inaccurate or incomplete, you’re more likely to have errors and compliance issues. On the other hand, complete and accurate books can help you resolve disputes quickly, aid in legal compliance, provide business insights and streamline HR processes.
Tips for Avoiding: Use an automated payroll system to store and periodically backup payroll data and perform regular payroll records audits.
6. Missing Deadlines
Whether from poor planning, cash flow issues, administrative oversight or personnel absences, failing to file payroll taxes or pay employees on time is another costly error. Not only is it bad for morale, it also violates labor laws and can lead to legal issues, hefty fines and penalties. Consistent delays can even trigger tax audits.
Tips for Avoiding: Establish a payroll calendar and stick to it, set reminders and alerts for important payroll dates and maintain sufficient cash reserves to cover payroll.
7. Mishandling Garnishments & Deductions
Improperly handling wage garnishments and deductions can cause legal and financial issues such as liability for the debt, fines, and legal fees. Common errors come from misunderstanding garnishment orders, missing deadlines, withholding the wrong amount, failing to update orders and not handling court orders correctly. There are certain laws that protect employees by placing a cap on garnishments based on disposable earnings and it’s up to employers to track garnishments and ensure timely payments.
Tips for Avoiding: Stay organized, properly train staff, regularly review and updated records, use a payroll software that can automate garnishment calculations and payments.
Avoid More Errors with Our Managed Payroll Services
If the stress of payroll is preventing you from growing your business, let us help. Arsenault CPA Firm is an experienced New Mexico accounting and tax firm specializing in small and growing businesses. Our managed payroll services ensure accurate and compliant compensation and offer the tools and support you need to grow your workforce, reduce non-compliance risks, and manage labor costs. Let us increase your efficiency and reduce your payroll stress. Contact us for a free consultation.