8 Common Payroll Issues + How To Avoid Them

Here are five critical things you need to know about dealing with payroll issues:

  • Payroll issues are more common than you think
  • Payroll issues can cause compliance problems
  • Payroll issues can be costly
  • Payroll issues erode employee trust
  • Payroll issues are usually avoidable

Imagine that you’re running your company’s payroll when you notice that a few employees seem to have much smaller paychecks than usual. You check their timesheets against your payroll data and realize you’ve just underpaid them. By then, their direct deposit has already landed in their bank account.

Sound familiar?

Business owners and HR professionals know how frustrating payroll issues can be. If you’ve ever made a payroll mistake, you’re not alone. Fortunately, there are steps you can take to avoid them.

How often do payroll issues happen?

According to a study from Ernst and Young, one in five payroll runs contains at least one error. Furthermore, HR and payroll professionals receive an average of 30 pay-related questions from employees each pay period. 

The study reveals that the number-one payroll error is missing or incorrect time punches. This can be due to employees forgetting to clock in. However, it can also be due to HR professionals losing timesheets or entering false data.

A few other reasons for frequent payroll issues include:

  • Missing expenses
  • Incorrect PTO calculations
  • W-4 setup errors
  • Visa status update errors

It can be difficult for HR and payroll professionals to keep up with all the paperwork, calculations, and compliance needs for every employee. This is especially true if the business is growing. While most payroll runs aren’t problematic, a lack of time to process payroll means sometimes things go awry. 

What are the most common payroll issues that companies face?

Payroll errors can cost a company over $700 per mistake. Unfortunately, they can also impact employee trust and satisfaction.

Knowing what can go wrong is the first step to preventing it. Here are some of the most common payroll problems and how they affect businesses.

1. Inaccurate employee time tracking

Employees can falsify timesheets or forget to enter their hours worked. They may inaccurately estimate their time or neglect to document overtime shifts. 

If you’re responsible for keeping up with timesheets, it’s possible that you could lose them or enter the data wrong.

Such mistakes can cause you to overpay employees. However, they can also lead to hefty fines, penalties, lawsuits, and even audits from regulatory agencies if you underpay. Accurate time tracking is crucial for maintaining compliance, employee trust, and your budget.

Related read: 11 Best Employee Time Tracking Apps

2. Tax form errors

Tax form errors can result in an employee having the wrong amount withheld from their paycheck. If too much is withheld, the employee will receive a smaller paycheck than expected, which could cause financial stress or a loss of trust. If too little is withheld, they may owe the IRS.

Not filling out or filing employee tax forms correctly also impacts your ability to pay the company’s payroll taxes accurately. This is not only a compliance issue for the business but can also result in you owing the IRS a lot of money.

3. Incorrect pay calculations

Incorrect pay calculations can lead to overpayment. You could also fall out of compliance with labor laws by not paying employees what they’re owed. Incorrect pay calculations will also inevitably give rise to inaccurate tax filings and accounting ledgers, causing further compliance issues.

4. Misclassifying employees

The Fair Labor Standards Act entitles employees to certain rights based on their employment status, such as overtime pay and a guaranteed minimum wage.

If you accidentally misclassify an employee, you may end up denying them the wages they’re due. This can cause tax and accounting errors and put your business at risk of labor law noncompliance.

5. Miscalculating (or not paying) overtime

Miscalculating or failing to pay overtime is a labor law violation. It can also cause financial problems and dissatisfaction among employees.

Overtime miscalculations can also lead to inaccurate labor-cost tracking. If you don’t know whether your employees are incurring too many overtime hours, you won’t be able to adjust schedules accordingly. This can easily create budget and forecasting issues.

6. Disorganized recordkeeping 

There’s a lot to juggle when it comes to payroll data. From timesheets to tax forms to benefits elections, it can be challenging to manage it all.

You’re likely to miss something if you’re using multiple spreadsheets or paper documents to keep track. Unfortunately, even one wrong entry can result in a costly payroll error. Organized recordkeeping ensures that you stay compliant and pay employees correctly and on time.

7. Missing payroll report deadlines

The IRS expects your business to file payroll taxes promptly and accurately. If you don’t report on time by filing the correct form, you could incur a financial penalty.

Even being late by just six days can result in a penalty of 5%. That number only increases the later you report your tax liabilities. If you want to avoid fines, penalties, and compliance audits, it’s best to report in a timely manner.

8. Failure to comply with tax regulations

If you don’t comply with tax regulations, you may face costly fines, penalties, and audits from the IRS. Tax authorities can file liens or levy your bank accounts and any business income you have. If you continue down this path, the IRS has the power to shut down your business, which would impact everyone on staff.

What happens if you make a payroll error?

Making payroll errors can have a wide range of consequences, including:

  • Wasting labor hours correcting the mistake
  • Wasting money due to overpaying employees
  • Being audited, fined, or sued for violating labor laws
  • Being audited and fined for violating accounting regulations
  • Incurring tax penalties due to failure to report or pay on time and accurately
  • Incurring a lien or bank account levy from the IRS
  • Owing retroactive tax payments
  • Experiencing high employee turnover due to loss of trust
  • Experiencing a loss of business productivity due to employee disengagement

The severity of the consequences often depends on whether the mistake was intentional and how long it takes to be corrected. That’s why it’s important to catch and fix payroll errors as soon as possible.

How to avoid payroll issues: 5 tips

The thought of making a critical payroll error can be anxiety-inducing. Fortunately, it’s possible to avoid most mistakes. Here are five tips to help.

1. Automate your payroll process

Consider automating your payroll process with payroll software. This is a much more cost-effective solution than hiring payroll services.

An industry-leading platform like When I Work keeps your schedule, timesheets, and payroll all in one system to automate your calculations and even help ensure compliance. Such a solution can drastically reduce the chances of human error.

Read also: 9 Best Payroll Software in 2024

2. Create a payroll management checklist

Payroll is a continuous process with many moving parts, including paying taxes and verifying that records are current.

Using a payroll management checklist can help you keep track of tasks and ensure that you complete each one. It can be a “living” document you come back to regularly and update as rules, regulations, and business operations change.

3. Get to know the relevant tax forms and regulations for your business

It’s hard to follow tax laws and regulations if you don’t know what they are.

Remember, this isn’t just the purview of your legal team. Business owners and HR professionals need to know what’s required of them regarding payroll taxes, labor laws, and the like to keep the business out of trouble.

4. Keep track of your records

The federal government mandates that you hold on to pay records for at least three years. Whether you choose an electronic or paper filing system, you must find an organization method that works for you. 

5. Use an employee time tracking software

Keeping up with paper timesheets takes time and effort. Make time tracking easier on yourself by leveraging employee scheduling software to create schedules and giving employees an electronic time clock they can use to clock in and out.

When I Work is a robust full-service payroll solution that includes both of these features and uses them in the payroll process, meaning you’ll never have to do another manual calculation as long as you’re in business.

When I Work is here to help you prevent payroll issues before they happen

Payroll issues are costly in many ways. They can cause employees to disengage or lose trust. They can also cause fines and penalties due to noncompliance.

When I Work payroll software offers a solution to these problems by automating your payroll and compliance tasks. The platform includes all timesheet data, automates calculations, and uses that to run payroll in a single click. As a result, you save time, money, and frustration.

Sign up for a free trial today to see for yourself how When I Work can help you pay your employees accurately and on time.

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