From misclassifying employees and failing to distribute a W-2 to a simple record-keeping error, payroll mistakes cost in terms of fines and business, morale, and turnover. Here are some of the most common payroll errors.
COMMON PAYROLL MISTAKES
Payroll mistakes are more common than you think. According to a recent Ernst & Young (EY) study, 1 in 5 payrolls contains errors costing about $291 per error on average, not including the added cost of compliance penalties and the time to resolve the mistakes.
Some of the most common errors include:
Record-keeping Errors. Failing to keep accurate records lead to inaccurate pay rates, errors in overtime calculations, and missed payments.
Making Late Payroll Tax Payments. Making late tax payments can result in interest charges and a 15 percent failure to deposit penalty. https://www.irs.gov/payments/penalties
Not Distributing W-2 Tax Forms. Failing to provide a W-2 is another common payroll mistake. Each year, employers are required to file a W-2 for each employee by Jan. 31. A copy also needs to be distributed to employees as well.
In a recent survey, only 45% of businesses provide their employees with W-2 forms, despite this being required by federal law. Once the W-2 is late, penalties apply based on when the corrected W-2 is filed. For example, if the corrected W-2 is filed after Dec. 31, 2023, the penalty is $60 per W-2 if filed within 30 days of the due date. The maximum penalty for a small business is $220,500 per year. The fees continue to increase if filed more than 30 days after the due date.
Misclassifying Employees. Employee or independent contractor? Exempt or non-exempt? One of the most common payroll mistakes is misclassifying an employee, which can lead to fines, incorrect pay, underpayment of taxes, and legal issues. This simple error can cost thousands per misclassified worker and additional penalties and interest charges.
Failing to Withhold Correct Taxes. Employers are required to withhold payroll taxes, including federal income tax, Social Security tax, and Medicare tax, from employees' paychecks. Failure to withhold the correct amount can lead to penalties and interest charges.
Mistakes Tracking Time. Tracking employee hours is essential for calculating pay. Mistakes can lead to errors in paying salaries, bonuses, and overtime pay.
Not Providing Accurate Pay Stubs. Employees are entitled to accurate pay stubs showing their gross pay, deductions, and net pay. Failure to provide accurate pay stubs can result in legal issues.
Failing to Comply with Minimum Wage Laws. Employers failing to pay the federal minimum wage may be subject to fines and penalties of up to $1,000 per violation. In addition, many states also have minimum wage laws. In cases where an employee is subject to both state and federal minimum wage laws, the employee is entitled to a higher minimum wage.
Errors in Calculating Overtime. After a Department of Labor investigation, a residential contractor was required to pay $320,000 after denying overtime wages to workers. The Wage and Hour Division determined that the company failed to pay overtime for hours over 40 in a workweek to their piece-rate and hourly workers and also failed to maintain proper records of their employees’ work hours and other payroll records. Both mistakes violated requirements under the Fair Labor Standards Act.
Unless exempt, workers covered under the Fair Labor Standards Act (FLSA) must receive overtime pay for hours over 40 in a workweek at a rate not less than time and one-half their regular pay rate. Employers who fail to pay are subject to back wages and penalties per violation.
Failing to Comply with State and Federal Labor Laws. In addition to federal tax regulations, employers must also follow state regulations, as each state has its own rules regarding taxes, overtime pay, termination pay, and minimum wage.
Failing to Keep Up with Changing Tax Laws. Over the past decade, the tax code has been revised more than 4,000 times. Because tax laws are constantly changing, employers need to stay updated to ensure compliance and avoid penalties.
THE HIDDEN COSTS
Fines and penalties are not the only consequences of payroll errors. There are also hidden costs. Here are some of the most common.
Increased Turnover. Inaccurate or late paychecks can result in losing some of your best talent. A Kronos study shows that 49% of workers will start a new job search after experiencing just two problems with their paycheck.
Added Administrative Costs. From reissuing paychecks, reconciling payroll records, and dealing with employee complaints, correcting payroll mistakes can be time-consuming and expensive in terms of added administrative costs.
Damage to Your Company’s Reputation. Payroll mistakes can damage a company's reputation, leading to negative reviews, loss of business, and increased turnover.
Legal Costs. In addition to penalties, payroll errors can also result in legal costs. In the EY study, one in six employers surveyed experienced litigation issues related to payroll errors. Overall, employers reported an average of 32 legal complaints, with resulted in $3,200 in direct costs and 29 hours of staff time to resolve.
HOW TO PREVENT PAYROLL MISTAKES
The good news is that many payroll mistakes are preventable. Employers can minimize the risk of payroll mistakes by following a few steps.
Use Top-Rated and Reliable Payroll Software. Using payroll software can help automate and streamline the payroll process, reducing the likelihood of errors.
Keep Accurate Records. Keep track of all payroll transactions, including salaries, wages, benefits, and tax obligations. This documentation can help you quickly identify and correct errors before they cause problems.
Stay Current with Federal, State, and Local Tax Laws and Regulations. Federal, state, and local tax laws and regulations frequently change, so staying on top of the latest updates is essential to ensure compliance.
Communicate with Employees. Communicate with employees about their pay, benefits, and deductions to avoid misunderstandings and potential legal issues.
Seek Expert Guidance. According to a Deloitte Global Payroll study, 73% of employers already outsource some aspect of payroll. Seeking expert guidance by working with a professional payroll service or an IRS-certified Professional Employer Organization, like Propel HR, can help to avoid mistakes and ensure timely and accurate payroll processing and that filing deadlines and timely IRS deposits are met.
By working with a PEO, employers gain access to expertise and comprehensive services, including payroll, benefits administration, compliance assistance, and Human Resources. Additional benefits include cost and time savings for managing payroll, benefits, compliance, and HR functions and providing access to high-quality health plans.
GET PEACE OF MIND
When it comes to payroll, there’s no room for mistakes – or delays. 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 April 19, 2023)
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