Common Payroll Errors

Payroll is a vital accounting function for any organization because it ensures that employees are compensated appropriately for their work and the business is complying with all applicable laws.

​Mishandling payroll can result in having to pay back owed wages to employees and back owed taxes to the government, as well as being hit with costly penalties.

Additionally, employees can quickly become disenfranchised and lose faith in the company if they are paid late or paid incorrectly. Negative employee sentiment can poison the corporate culture, hurting retention and stifling revenue growth.

Committing payroll errors is incredibly risky on all fronts, which is why payroll accuracy is of the utmost importance. Understanding which types of payroll errors are common can help business owners to avoid these pitfalls and keep consistency in their payroll functions.

Payroll Calculation Errors

• Misclassifying Contractors
  
  From a payroll perspective there is a significant difference between employees and contractors even if they are doing similar work. Contractors do not need to be paid minimum wage or overtime. Additionally, companies do not need to do employment tax withholding for contractors. However, they are required to send contractors 1099 forms at the end of the year for their own tax records.
  
  Misclassifying contractors can affect payroll accuracy by altering withholdings, resulting in errors that can ripple through compensation amounts and payroll taxes. These mistakes can increase the likelihood of audit for both the business and contractor.
  
  
• Confusing Exempt and Nonexempt Employees
  
  There are strict federal and state requirements for exempt employees, which means that employers must ensure all conditions are necessary for exempt status before classifying an employee as exempt. This classification is important because exempt employees do not get paid overtime. Nonexempt employees get paid a standard overtime rate (150% of regular pay) unless otherwise indicated by state or city regulations. Incorrectly categorizing an employee’s status or miscalculating overtime rates error can affect both the employee and the business, potentially shorting an employee of wages earned and damaging the integrity of the organization’s financial reporting.
  
  
• Using an Outdated Payroll Tax Table
  
  Companies must pay taxes related to federal/state/local income tax, Social Security and Medicare tax, and unemployment tax. These taxes change regularly, necessitating that a business change their calculations in real-time. For organizations that use payroll software or a payroll provider, these are usually automatically updated. However, employers should audit these tax tables periodically to ensure that the rates are correct. Not every software will include local taxes (and even those that do cannot necessarily guarantee local tax accuracy nationwide), requiring business owners to manually adjust these tax rates.
  
  
• Improperly Handling Wage Garnishments
  
  Wage garnishments from court orders, child support agreements, and levies require that employers send an employee’s payment to the correct recipient. The consequences of not handling wage garnishments correctly can be very serious.
  
  

General Payroll Errors

• Missing Deadlines
  
  The most common payroll mistake that small businesses make is running payroll on an inconsistent schedule. Business owners that miss payroll deadlines may end up needing to pay employees by check instead of direct deposit, which can carry additional processing fees, and inconvenience employees to boot.
  
  While some business owners may just be unorganized and forget to get payroll done in time to have direct deposits processed, others may use this as an underhanded tactic to manage cash flow. Some startups and struggling businesses may delay payment to employees to keep enough cash in their accounts to buy inventory or pay suppliers. This is a surefire way to anger employees, leading to turnover and hurting future recruitment.
  
  Additionally, failing to send the correct tax forms on time can get employees and contractors in trouble if they end up having to file their taxes late or submit an amendment on taxes that have already been file. Again, this can hurt employee morale, retention, and the overall culture as well as open the business and the individual up to an increased risk of being audited by the IRS.
  
  
• Improper Records Retention
  
  Typically, employers should keep payroll records for three years, although some states may have even longer requirements. Payroll records will be required if the business is audited. Keep records on employees that list their contact information, Social Security Number, hours worked, pay rate, and payroll dates at the very least.
  
  
• Breaking Confidentiality
  
  Payroll information should only be shared with payroll staff or senior management to maintain confidentiality. Physical and digital payroll information should also be stored securely to prevent unauthorized access. Access of unsecured information can legally be treated the same as overtly sharing the information.
  
  

Avoiding Errors

• Remain Current
  
  Staying up to date on current payroll laws, regulations, policies, and requirements is the most effective way to avoid errors. Encourage a culture of continuous learning and ensure that all leadership is taking part in the initiative.
  
  The IRS has a Payroll Professionals Tax Center and an Online Learning Center that provides resources to keep managers up to date on the latest payroll information.
  
  
• Stay Organized
  
  Use the right organizational tools and apps to conduct payroll functions in a timely manner. Set reminders, use checklists, and keep how-to resources related to ongoing payroll operations to create redundancy in case whoever is usually responsible for payroll is out of the office.  
  
  
• Outsource Payroll
  
  The easiest way to reduce payroll errors is to lean on a professional to manage bookkeeping or accounting for your organization. A licensed or well-vetted expert at an accounting firm can offer the knowledge base and experience that many business owners lack to manage payroll with a high degree of accuracy.
  
  

If you have any questions about your company's payroll needs, get in touch with Eric or Todd today. We have a team of experts who can help.