Payroll management is an important aspect of running any business, and it can present a variety of challenges. It’s critical to get it right. When not done right, payroll errors cause employee dissatisfaction, which can seriously damage staff morale, and non-compliance with tax or labor laws can lead to significant penalties. A single incorrect digit in payroll calculation can have disastrous consequences.
Payroll errors also have a negative impact on profitability, especially during the Great Recession and economic downturn, when finding, retaining, and motivating the right talent can be extremely difficult.
So, today we are highlighting 8 common payroll mistakes while sharing how to keep them at bay. Let’s dive in!
1. Missing payroll deadlines
Deadlines are equally important when it comes to payroll taxes. Missing a tax deadline can cost your business a lot of money in late fees, penalties, and even legal trouble.
Also, your employees rely on your company to pay them consistently and on time; failing to adhere to a consistent schedule can erode employees’ trust and opinion of the company. Not to mention that many states have pay frequency mandates.
💡 Smart solution:
Knowing your timeline is essential for a smooth payroll process, internally for paydays and externally for taxes. The best way to avoid such payroll errors is to invest in a comprehensive payroll system that will remind you of your payroll tax due dates.
Payroll software usually comes with a calendar and the ability to set up automated payments. As a result, it relieves you of the burden of remembering tax deadlines and assists you in sticking to a consistent schedule. You can also hire payroll tax filing service providers to avoid dealing with payroll tax deadlines.
2. Payment miscalculations
Each employee has a salary structure that includes things like base pay, allowances, bonuses, provident fund contributions, and more. Each component must be calculated in accordance with the structure promised to the employees. Variable payouts and increments must be calculated for each employee based on performance appraisal data.
Any errors in updating these data or calculations can result in overpayments or underpayments that must be resolved through out-of-cycle payment adjustments. It can also be annoying for the employees leading to a negative employee experience and decreased productivity.
💡 Smart solution:
Miscalculations can be easy if you do all of the calculations yourself or do everything manually. If you really want to avoid any payroll errors when it comes to calculations, make sure to double-check tax rates, make sure you’re calculating overtime pay accurately, and use a payroll management system for accurate calculations.
Employing a payroll platform would ensure that the latest version of the salary structure for every new hire and employee is available automatically for payroll calculation.
3. Not keeping clean payroll records
Maintaining a clean payroll not only benefits your employees and your company, but it also keeps you in compliance with company policies.
However, failure to keep clean payroll records may be the most costly payroll mistake for your company. It increases your chances of being sued or penalized by the government, resulting in chaos and confusion within an organization.
💡 Smart solution:
Keeping accurate and clean payroll records is a difficult yet possible task with the right tools. You can streamline the process of maintaining your employees’ payroll records by automating your payroll system, thus, minimizing the chances of human error.
Furthermore, payroll software includes useful tools such as timekeeping software, cloud-based storage, and direct deposits to help you save time and effort. The other benefits of payroll platforms include ease of use, affordability, real-time tracking, and compliance with government regulations.
4. Tax calculation errors
Income tax deductions at source (TDS) and professional tax deductions apply to employee salaries. The tax slabs and rates are subject to change, not updating them can lead to wrong calculations and payments.
Furthermore, the payroll team must correctly calculate the tax based on the employee’s standard tax exemptions, investment proofs, and other income declarations. Not being able to do so leads to inaccurate payouts, late fees, penalties, and interest payments.
💡 Smart solution:
Keep track of your employment tax rates each year so that you are aware of any changes. Keep an eye on local income tax, medicare tax, state income tax, social security tax, and so on, depending on your location.
At the same time, a comprehensive payroll system can assist you in accurately and easily preparing various taxes. A sophisticated payroll tool is capable of taking different countries’ taxation rules into account and deducting taxes in accordance with the laws set by each government.
5. Misclassifying employees
Employee misclassification is a widespread problem that can be costly to your company. Making the incorrect determination about whether an employee should be exempt from overtime is one of the most common misclassification errors. Unless they are exempt, all employees must receive overtime pay for any hours worked in excess of 40 per week under the Fair Labor Standards Act (FLSA).
Another common payroll error occurs when an individual is classified as an independent contractor rather than an employee. This frequently necessitates the investigation of historical payroll records and the processing of retroactive payments or other adjustments.
💡 Smart solution:
To avoid such serious payroll mistakes, you should think about hiring a reputable payroll management service provider to ensure accurate worker classification and avoid misclassification lawsuits.
Consider hiring contractors or freelancers through leasing companies to protect your company from misclassification penalties. Though hiring freelancers through leasing companies can be costly, it will greatly reduce misclassification risks.
6. Confusion between exempt vs nonexempt employees
As we already discussed above, classifying employees correctly and knowing whether they are classified as exempt or nonexempt is pretty important. However, one common mistake employers make, failing to distinguish between the two statuses and incorrectly classifying employees. This again leads to many consequences and pay-related issues.
💡 Smart solution:
To avoid this common payroll error, learn the difference between exempt and nonexempt employees. Exempt employees are those who are not covered by the Fair Labor Standards Act (FLSA) and are not entitled to overtime pay. Employees who are not exempt, on the other hand, are entitled to overtime pay and are covered by the FLSA. Do not try to disguise a nonexempt employee as exempt else you will have to face FLSA-related fines.
7. Delays in providing tax forms to employees
Every employer is required to provide tax forms (Form 16 in India) to salaried employees by the deadline in order for them to file their individual tax returns. These forms detail the breakdown of all salary components paid out during the fiscal year.
They also keep track of the TDS paid by the employer on behalf of the employees. Penalties apply if these forms are not downloaded from the tax department portal and distributed to employees on time.
💡 Smart solution:
Use self-service portals such as Toast Payroll to allow employees to download digitally signed tax forms. Set up automated emailers to send out tax forms as well. These emails must be scheduled well in advance of the individual return filing deadlines.
8. Poor payroll process
Poor payroll processes contribute to a negative workplace environment, making it difficult for businesses to retain employees. This frequently results in a negative employer reputation. And who would want to work for a company that can’t pay its employees on time?
This leads to problems with employee retention and attracting new talent which is costly. Not to forget the time and money spent on recruiting, interviewing, onboarding, and training new employees. Thus, businesses require a modern and dependable payroll system to improve talent attraction and retention while also lowering business costs.
💡 Smart solution:
A thorough examination of existing processes will assist you in identifying inefficiencies and areas for improvement. If your company is experiencing errors and requires a new approach to payroll management, you should think about switching payroll providers.
As you identify your company’s payroll priorities, you can find a payroll partner or software that shares your objectives and then take careful steps to ensure a smooth transition.
You can also document your payroll process using a knowledge management platform so that every new hire knows how the payroll process works at your organization.
Manage your payroll efficiently
Payroll errors cannot be completely avoided; however, proper planning can help you keep such errors at bay and minimize payroll risks, regardless of the size of your company.
The first step in preventing payroll errors in your company and preserving a smooth payroll process is to be aware of the most common mistakes that are likely to occur. And, while running a smooth payroll may seem like a difficult job at times, it has a large impact on many other aspects of the larger organization, such as employee satisfaction and even company culture.
So, recognize the aforementioned mistakes and invest now in perfecting the payroll process so that your company does not pay for them later.
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