How to Fix Payroll Problems

Payroll problems are the type of issue that every company hates because they typically take a lot of time to identify and resolve and the employees that are affected are typically not very forgiving when the error requires payroll adjustments to correct. Additionally, in the case of public companies, payroll problems can quickly become big news, casting the brand in a negative light internally as well as externally. 

A businessperson in frustration looking at the word “Payroll” surrounded by related icons

The considerable time required to fix payroll mistakes is a significant penalty for any company to pay when an error occurs. Then, when you figure in the added cost of reduced employee satisfaction, which in turn can lead to turnover or hamper future hiring efforts, the cost of experiencing payroll problems becomes even steeper.  

​Understanding which types of payroll mistakes happen most frequently as well as what you can do to prevent them is the best defense a company has against experiencing costly payroll problems. In many instances, leaning on the right personnel and using the right technology are going to be instrumental in avoiding payroll errors. Let’s take a look at what your accounting team can be doing to thwart payroll problems on a daily basis:

Common Payroll Issues
Employee Classifications
Classifying employees correctly is vital in ensuring that they are paid correctly, and you are paying the appropriate payroll taxes for the work they are performing. In the wake of COVID more companies are utilizing independent contractors than ever before. With so much of the workforce being geographically dispersed, independent contractors may be inadvertently lumped in with fully remote or hybrid in-house employees. But even among in-house employees, a clear distinction must be made between exempt and nonexempt employees.

Payroll Deductions
Payroll deductions for benefits and retirement contributions can be tricky to calculate on an ongoing basis, especially when they vary between employees. Rely on a payroll software to correctly manage payroll deductions across different worker classifications as well as from one pay period to another.

Paycheck Errors
Paychecks are notoriously prone to errors because they vary based on an individual employee’s circumstances. When employees are absent (due to sick time or PTO) or on leave (due to disability or furlough), this needs to be appropriately reflected in their paychecks.  Additionally, when employees receive bonuses or raises, these need to be reflected in the time period in which they are awarded.

Any errors in these areas can result in overpayments or underpayments, which will be reflected in an employee’s W-2 if left uncorrected. If an employee does not notice the error and uses and incorrect W-2 to file their taxes, they may be forced to amend their tax returns and refile, pay penalties, or even face an audit. Needless to say, this creates an incredibly frustrating situation for an employee and can irreparably break the employer-employee trust bond.

Hours and Overtime
“Hours worked” is not simply the number of hours that an employee spends in-office or on location doing their regular job. Time put in outside of their traditional work (including training, traveling between locations, and teambuilding activities), is also included in the calculation.  Furthermore, time put in on top of their usual work schedule for nonexempt employees is subject to overtime or holiday pay rates, which represent a premium over regular wages. Hours and wage rates must be accurately recorded to ensure that payroll is correct.

Other Compensation
Employee compensation is more than just salary/hourly wages, overtime, commissions, and bonuses. Other forms of taxable compensation include stock, equity, rewards, gifts, and use of company property. Legally this compensation must be tracked and reported as well.

Payroll Taxes
Payroll taxes are comprised of federal and state income tax, Social Security and Medicare tax, and potentially local taxes as well (where applicable). They are constantly changing and extremely difficult to get right for companies of all sizes, especially where manual processes are involved. Subsequently, the best way to stay in compliance is to use a payroll tax software to keep track of all these nuanced tax regulations. The penalty for unpaid payroll taxes can be extremely steep, which is why this is such a critical area to ensure accuracy!

6 Ways to Avoid Payroll Problems
1. Meet Deadlines
Keep a calendar of what needs to happen when – like processing payroll, sending out tax forms, filing payroll taxes, and so on. Use automation where possible to increase efficiency by scheduling payroll and payroll tax payments.

2. Keep Clean Payroll Records
Audit payroll regularly to identify errors right away and clean them up effectively to ensure your payroll records remain clean. Retain records for an appropriate period of time but separate out old records from current records to stay organized. If your payroll system is disorganized, consider bringing in a consulting accountant to get your payroll records in order. 

3. Create Formal Payroll Policies (And Adhere to Them!)
Clearly outline payroll policies and schedules to communicate them with new hires and existing employees as well as your accounting and payroll teams. Once policies have been established, ensure everyone follows them to the letter of the law.

4. Streamline Payroll Process
Use a full-service payroll provider or payroll software to automate payroll as much as possible and then integrate payroll platforms and systems for seamless communication. Align payroll and HR to keep track of pay changes and compensation-related events in real-time.

5. Rely on Reporting to Quickly Identify Errors
Regularly run payroll reports and use them to provide a baseline to identify payroll deviations that may signal a problem. Investigate anything that seems off and spot check records to look for errors.   

6. Stay Up to Date with Applicable Laws and Regulations
Stay informed about what is going on with payroll laws and payroll tax topics. Encourage your accounting staff to regularly use some of their time for professional development in these areas to keep them abreast of what is changing.

When you are dealing with payroll and other complicated bookkeeping and accounting functions, you do not have to do it alone! We offer bookkeeping and accounting services to companies that need help with their day-to-day financial functions. Whether it is payroll and benefits or accounts payables and accounts receivables, we can provide as much or as little help as you need. Contact us today to find out more about how our experienced team can provide the part-time bookkeeping and accounting help you need!