From miscalculating pay to record-keeping errors, a simple payroll mistake can cost your small business. Here are some of the most common payroll mistakes (and how to prevent them).
What causes payroll to be prone to so many errors? Payroll studies show that businesses of all sizes and industries face challenges in delivering accurate and on-time payroll. Common issues include:
- Staying Compliant. Keeping up with new employment laws, changing deadlines, and constant updates make staying compliant an ongoing challenge.
- Managing the Complexities of Multi-state Payroll. In addition to federal laws, employers must adhere to state laws where employees are working. These employment laws and regulations differ from state to state and can be complex, especially for multi-state employers.
- Limited Tools and Technology. Without the right tools or technology required to process payroll or analyze data, employers have to process payroll manually, exposing employers to errors.
Your Payroll Could be Costing You
Payroll mistakes can be costly in terms of lost revenue, the staff time required to correct errors, and potential legal action and fines.
According to the Ernst & Young (EY)study, payroll mistakes cost, on average, $291 per error to remedy and that's not including the added costs of potential compliance penalties and fines. In addition to hard costs, payroll errors also cost in terms of time. The study also found that, on average, it takes one full-time employee over half a year to resolve payroll issues - that's valuable time that could be used to focus on other priority areas.
Among those surveyed, the most common mistakes include those related to time and attendance, and expenses, which occur on average more than once per employee per year. And the mistakes that proved to be the most time-consuming to resolve include missing and incorrect time, sick time, expenses, and mistakes related to setting up health savings plans.
8 COMMON PAYROLL MISTAKES
Miscalculating Pay. With overtime, commissions, deductions, and PTO, your payroll team has a lot to juggle when it comes to calculating pay. Without a reliable system for tracking employee hours or paid time off, the chance of making a payroll overpayment or underpayment error is inevitable.
Misclassifying Employees. Misclassifying employees can lead to tax penalties and legal issues. Not only can misclassification prevent an employee from receiving benefits and wages, but it may also mean taxes errors, resulting in fines, penalties, and potential back pay. Regularly review the IRS guidelines for employee classification and your workers' status to prevent this mistake.
Processing Payroll Manually. Manual payroll processing exposes employers to human error and can consume valuable time to correct. Invest in cloud-based software or hire a payroll service provider to streamline the process and reduce the risk of errors.
Lack of a Reliable Record-Keeping Process. Not having a reliable record-keeping process can result in compliance issues and employee disputes. In addition, audit activity is expected to increase as part of the Inflation Reduction Act to modernize the IRS and will focus on executive compensation, fringe benefits, and employment tax compliance. It's a good idea to prepare now by conducting an internal audit by reviewing payroll and employment tax administration practices to identify potential compliance risks. Also, conduct an employment tax audit to identify any issues with employment tax, tax information reporting, fringe benefits, and executive compensation.
Late or Missing Payroll Tax Payments. IRS (FICA) Form 941 and (FUTA) Form 940, Form 1096 Annual Summary, Forms W-2 and W-3 and Quarterly Form 941, are just a few examples of the many important forms your payroll team has to regularly manage. Missing tax deadlines and filing late leads to penalties, interest charges, and legal issues.
Failing to Keep Up With Changing Tax Laws. Tax laws are constantly changing and can vary from state to state. Many payroll errors result from payroll staff who are not current with the latest tax regulations for payroll compliance.
Not Verifying Minimum Wage Requirements. Under the Fair Labor Standards Act (FLSA), the federal law requires covered non-exempt employees to be paid a minimum wage of $7.25 per hour. Many states also have minimum wage laws. When an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher minimum wage rate.
To learn more about applicable minimum wage laws in the states where you have employees working, visit the Department of Labor’s interactive map. Also, follow the DOL for updates on proposed minimum wage increase and submit public comments through the federal register by Nov. 7, 2023.
Ignoring Overtime Regulations. Failure to pay overtime correctly can lead to wage disputes and legal actions. Familiarize yourself with overtime laws where you have employees working and ensure accurate calculation and compensation for overtime hours. For example, the standard rule for overtime pay is 1.5 times an employee’s hourly rate for every hour worked beyond 40 hours a week. If your state's overtime rules differ, you must comply with the regulations that are most beneficial to the worker.
Preventing Payroll Mistakes: The Solution
The good news is that by investing in the right tools and expertise, most payroll mistakes can be easily avoided. Many small and medium-sized businesses turn to outsourcing for help with tax filings and other complex administrative tasks related to processing payroll.
A study by Deloitte found that 73% of companies currently outsource at least one aspect of their payroll. More than half of businesses surveyed have worked with their payroll provider for more than five years, with the majority experiencing improvements in such areas as compliance, accuracy, time management, and cost savings.
Outsourcing your payroll to an IRS-certified PEO, like Propel HR, provides the assurance and peace of mind that your employees’ paychecks are always accurate and delivered right on time. And if you need more help, we can also handle your benefits, compliance, and other important HR-related tasks and recommend custom solutions based on your industry, size, and location. By taking care of all this and more, you can get busy running your business, not your payroll. For more info, just give us a call at (800) 446-6567 or visit www.propelhr.com.
PLEASE NOTE: This information is for general reference purposes only. Because laws, regulations, and filing deadlines are likely to change, please check with the appropriate organizations or government agencies for the latest information and consult your payroll specialist and/or employment attorney regarding your responsibilities. In addition, your business may be exempt from certain requirements and/or be subject to different requirements under the laws of your state. (Updated Oct. 12, 2023)
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About Propel HR. Propel HR is an IRS-certified PEO that has been a leading provider of human resources and payroll solutions for more than 25 years. Propel partners with small to mid-sized businesses to manage payroll, employee benefits, compliance and risks, and other HR functions in a way that maximizes efficiency and reduces costs. Visit our new website at www.propelhr.com