Paying employees is a necessary part of doing business. On the surface, this seems like the least complicated workflow your company needs to manage. The truth is, there are a number of common payroll mistakes that companies make — and many of these can be extremely costly. Not only do you run the risk of an audit, but you can damage your relationship with employees and cause a major headache in pinpointing and fixing the issue that caused the error in the first place.
To avoid payroll errors, you need to know what they are and how to identify them. You also need an excellent payroll software solution in place to help streamline your process.
Any area of payroll reporting, data, and management is susceptible to error when you think about it. It really comes down to the accuracy of your information. If you accidentally mistyped something in the payroll, it's going to be wrong. The wrong number of hours will mean that everything on that payment cycle will be inaccurate.
You also need to be concerned with the overall information that's included in your payroll software on any set employee. This might include their tax filing status, number of dependents, and their salary/wages. Any miscalculation will cause payroll errors in every cycle until it's corrected.
Your payroll solution should have features to help you avoid payroll mistakes. Here are some of the most common payroll errors that companies make.
Your employee uses their W-2 and any other company-issued tax form to pay their income taxes. Any mistake here will cause problems for the company and the employee.
The classification of employees is a legal matter, not a company choice. Classifying an employee as an independent contractor will result in a significant problem because the company will need to pay fines and taxes, as well as interest. You may have independent contractors working for your company, as well as permanent employees. Make sure they are classified correctly in payroll.
Tax rates are subject to change, and it's the company's responsibility to stay informed and make those changes in payroll.
If there are mistakes in the number of hours the employee worked, the pay will be off. It's important to have solutions in place that make it easier for employees and managers to have accurate records of employee hours.
Overtime can be a difficult thing to calculate because it may differ per employee. Salaried employees do not receive overtime, but companies need to be careful in classifying these employees. Nonexempt employees are entitled to overtime when they work more than 40 hours a week.
Payroll mistakes can be costly, both from a monetary and employee experience perspective. Consider the following consequences of payroll errors:
Paylocity’s payroll software can address the consequences of payroll errors. Through streamlining the payroll process via automation, Paylocity eliminates the need for signatures, spreadsheets, and calculators. With the option to offer On Demand Payment to employees, you can ease any stress they have about paying their bills on time while keeping your cash flow intact. And as a registered reporting agent for the IRS, Paylocity can prepare and file your tax forms, ensuring your organization stays compliant.
A payroll discrepancy is any difference between what should be calculated and what is included on the employee's paycheck. This might mean that hours are missing, so the employee worked more hours than the payroll has accounted for. A payroll discrepancy can also mean an overpayment, which can be extremely costly for the company — especially if it's a processing error that caused all wages to be overpaid.
There are several different payroll discrepancies that can occur. Taxes might be improperly assessed, overtime might not be included, or overtime hours might be miscalculated. Any payroll error has some repercussions, and it's important that they are identified and fixed as soon as possible. You also can't depend on the employee to bring an error to your attention. They may not identify the error. If its root cause is in the way you're processing payroll, the error will likely be repeated every pay cycle until it's caught and remedied.
In the case of a payroll error, a correction must be made to ensure the accuracy of your payroll reporting. Circumstances under which you may need to make a payroll correction include over or underpaying an employee, incorrect withholding of taxes, or incorrect benefits deductions. A payroll correction can occur outside the current payroll run, and it’s important that you check your state laws to ensure how quickly you need to send payment to fix a payroll mistake.
If you identify a payroll error that needs to be corrected, you can follow the steps outlined below to ensure your payroll gets back on track:
When your payroll software has digital capabilities, your chance of incurring payroll errors is greatly reduced and if they do occur, fixing the error is significantly easier. With Paylocity’s solution, all of the above steps can be performed in one system.
The answer to this question depends on the state your company is in and the laws of that state. Overall, though, it's important to fix payroll mistakes as soon as you become aware of them. The longer it takes to fix a payroll error, the more likely you're compounding the problem. If the error is caused by faulty information in your payroll software, that error needs to be fixed before the mistake can be rectified.
In most cases, there will be a statute of limitations on the amount of time an employee has to collect payment owed to them. This time period may differ from state to state, but the most common is two years. For your company, it's important that your payroll accounting is audited internally on a scheduled basis to avoid these payroll errors and identify them to remedy them quickly.
Miscalculated payroll can impact your relationship with your employees. The best way to handle this is by being as forthright as possible and correcting the error. Your employee needs that information in writing. The employee payroll error or discrepancy letter should be kept in the employee file and in your internal records, as well.
The letter should explain the payroll issue, show how it was remedied, and explain what caused the initial error in the first place. This level of transparency helps the employee understand the issue and brings clarity to your own records.
The best way to avoid payroll issues in the future is to be proactive about finding a user-friendly payroll solution that keeps you accurate and compliant. Look for payroll software that allows you to:
Avoiding payroll mistakes in the future is as simple as finding a solution with capabilities that reflect the needs of HR professionals and enhance the employee experience through automation, accessibility, and customization.
With Paylocity’s payroll software integrated into your organization’s payroll process, you gain the ability to both identify and prevent payroll errors. Here’s how it works.
With one-click capabilities, automation of manual processes, and greater access for employees, payroll management becomes an extension of your employee engagement strategy all while ensuring your payroll is accurate and compliant.
Paylocity's payroll software is perfect for businesses that need a full solution for the modern workforce. Stay on track with new changes to laws, taxes, and your current employee classifications. Never miss a beat with an easy-to-follow workflow. Schedule a payroll software demo today!