Payroll mistakes are bound to happen, we’re only human. But with the right processes in place, you can greatly reduce the chances of errors that affect both compliance and your employees’ trust. This guide will walk through common payroll pitfalls, the impact they can have on your business, and tips for building a more reliable payroll system.
Why Payroll Mistakes Matter
Key Impacts of Payroll Errors:
- Damage to employee trust and morale
- Financial losses from overpayments or penalties
- Noncompliance with federal and state payroll regulations
We’ll cover the most frequent payroll slip-ups, how to steer clear of them, and what to do if one happens in your organization.
1. Missing Payroll Deadlines
Failure to pay employees or submit taxes on time can result in late fees and penalties. For example, businesses withholding over $1,000 in employment taxes must submit IRS Form 941 quarterly. Mark tax and pay deadlines on a shared calendar, or use software like Beyond that automates reminders and tax filings.
2. Paying Employees Late
Missing payday can hurt employee morale and productivity. In some states, such as Pennsylvania, late payments can even result in fines. Avoid delays by establishing a consistent payroll schedule and automating deposits.
3. Overtime Miscalculations
Under the Fair Labor Standards Act (FLSA), non-exempt employees must earn time-and-a-half for hours worked beyond 40 per week. Misclassifying employees or failing to track hours properly can lead to back pay and legal trouble. Use time-tracking tools integrated with your payroll system to prevent this.
4. Employee Misclassification
Mixing up employees and independent contractors can lead to tax issues and compliance violations. Employees typically get W-2s, while contractors receive 1099s. When in doubt, file IRS Form SS-8 for clarification.
5. Not Staying Up to Date on Laws
State wage laws and tax regulations change regularly. For instance, fast-food workers in California recently saw a mid-year minimum wage increase. Stay informed by subscribing to updates from your state’s labor department or working with a payroll provider like Beyond, which monitors changes for you.
6. Poor Recordkeeping
The IRS requires that payroll records be retained for at least four years. Keep thorough records, digitally or physically, of all pay, benefits, tax filings, and hours worked. A cloud-based system or secured cabinet can help stay organized.
7. Incorrect Retroactive Payments
Retro pay is owed when employees are underpaid in a previous pay period. Mistakes often happen due to missed raises, bonuses, or overtime. Always document retroactive calculations and use payroll tools to handle adjustments precisely.
8. Mishandling Wage Garnishments
Wage garnishments must be processed accurately and reported on time. Errors in calculating withholdings or ignoring court orders can result in fines and legal action. Use software that automatically tracks and processes garnishments.
9. Not Reporting New Hires
Most states require you to report new hires within 20 days. This supports child support enforcement and other employment verifications. If you’re not using a payroll provider like Beyond, be sure to add this step to your onboarding checklist.
10. Underreporting Taxable Compensation
Many perks, like bonuses and fringe benefits, are taxable and must be reported on W-2 forms. Failing to do so can lead to incorrect filings and audit risks. Review IRS guidelines or consult a tax professional to avoid missing anything.
11. Lack of a Clear Payroll Policy
A written payroll policy sets expectations around pay schedules, types of compensation, and deduction practices. Make sure everyone involved in payroll understands and follows these rules.
Best Practices for Payroll Accuracy
- Audit your payroll at least once a year to catch errors.
- Automate payroll tasks where possible.
- Evaluate your provider to ensure they meet current needs, consider Beyond if you need a more robust system.
- Create a payroll calendar and checklist to track tasks and deadlines.
Fixing Payroll Mistakes
If a payroll error happens:
- Identify the issue quickly and document it.
- Correct the error in the next pay run or as soon as possible.
- Communicate transparently with affected employees.
- Update your process to prevent future mistakes.
The Bottom Line
Payroll accuracy is more than a nice-to-have, it’s critical to your company’s financial health, compliance, and culture. Avoiding common mistakes and investing in reliable processes (and tools like Beyond) will give you peace of mind and help retain the great people you’ve hired.
