8 common payroll mistakes to avoid
Payroll is a finance-related business process that calculates and disburses employee salaries and benefits. To run a business successfully and keep its workforce motivated, companies should prioritize accurate and timely payroll processing. However, payroll management is a complicated task with many layers of guidelines, and it is constantly upgraded based on the company’s needs. Making mistakes in this aspect can not only cost resources and add-on finances to the company but also create a sense of distrust amongst the workforce.
Common payroll mistakes to avoid
With due diligence, companies can avoid several oversights. Some common errors include the following:
Not tracking working and overtime hours
It’s important for all businesses to note down the working and overtime hours of the employees not just for calculating payments but also to access productivity and efficiency for long-term business success. These issues are especially prominent when an employee travels for work or must participate in tasks outside the work hours or office premises. It’s best to automate this process using systems like biometrics to simply the payroll management tasks.
Sending incorrect W-2s
A W-2 is an important payroll document that enlists all crucial information related to the employee’s salaries, their benefits, taxable income, 401k, and other financial details. A company is liable to produce the document to the employees on a timely basis so they can file their taxes. If the company makes any mistakes in providing these, it may incur reissues and potential penalties.
Misclassifying employees and contractors
Any business needs to categorize the workforce based on the role they fulfill in the organization. This can include freelancers, contractors, vendors, employees, and others. Not only that, there are also overtime costs to companies for those who work over the standard 40 hours per week. To ensure that there are no errors while dispersing payments, it’s important to classify them properly, or the business may have to spend more hours and resources to sift through old records and make payment adjustments accordingly. In case there are errors with the overtime work calculations, the company may risk getting fined under the Fair Labor Standards Act (FLSA).
Making errors while calculating dues
Another common mistake businesses may end up making include miscalculating the payment dues, whether it is overpaying or underpaying the employees, not accounting for deductions accurately, or making faulty retroactive payments. Once these issues arise, they may take over a week to rectify, which not only adds to the company costs but also may financially and mentally stress the people dependent on the dues. One way to avoid this mistake is to allow the concerned teams some time to streamline and automate the process as much as possible and update the system as per the latest guidelines.
Missing the first paycheck for new hires
Most payroll data is automated, which includes all the data and calculations for current employees. At times, the company may forget to initiate payroll for new hires, especially if they joined late in the pay period. Such mistakes can lead to frustration amongst the new employees and also add to the company expenses to rectify the oversight.
Not reporting compensations for all taxable employee
Employees can benefit from several taxable compensations, including stock options, equity rewards, gift cards, and others. Often, these compensations make up a significant portion of employee salaries. Forgetting to report or account for them can end up costing more in terms of tax penalties.
Using the wrong tax code
Tax codes enlist tax obligations and entitlements of individuals and businesses. These codes often adjust with circumstances like changes in employment status and type of work, personal insurance, and other factors. Businesses should ensure that they maintain the right code so that the authorities can collect the right amount from the taxpayers. Any issues here can cost both employees and businesses.
Using manual data entry to maintain records
While the world has already digitized in a significant way, some businesses still use the old manual data entry process to organize their payroll records. There’s more chances of human errors when it comes to such meticulous number and data work and can often lead to delays or inaccuracies. So one’s advised to use modern automated payroll systems to not just disburse salaries but also generate earning statements.
To avoid all the hassle and risk of errors, it’s best to hire a payroll company that has extensive experience working with businesses of one’s size and industry, and understands the nuances and penalties related to payroll and misclassification.
