Payroll mistakes can be costly to your organization. Therefore, it's essential to be aware of what could go wrong. By processing payroll correctly and accurately, you can avoid fines and penalties while boosting employee satisfaction and your bottom line.
Avoid These Common Payroll Mistakes
Here's what you need to know about payroll mistakes law, so you know what to watch out for.
Misclassifying and Incorrectly Identifying Employees
A common payroll error is misclassifying full-time employees as independent contractors or paying minimum wage and overtime to contractors. However, treating employees like freelancers leads to disgruntled employees who want to be compensated for missing wages and benefits.
In addition, you could end up paying a hefty fine. That's because the IRS might think you're deliberately misclassifying employees to reduce labor costs. They also won't be happy about losing valuable tax dollars due to underpayment.
Employers who hire contractors don't pay a portion of their taxes, so misclassification of independent contractors leads to overpayment and financial losses for your business.
Not Complying With Tax Laws
One of the consequences of payroll errors is legal non-compliance which can happen in several ways. For instance, if you fail to stay up-to-date with tax laws, you will use the wrong tax rates and make inaccurate tax calculations. Your business may incur penalties as a result.
You can also fail to comply with tax laws by missing tax deadlines. This often happens when you send out tax forms to employees at the wrong time. Moreover, this mistake can be compounded by sending out the wrong tax forms, which also results in getting penalized by the IRS.
Not Tracking Employee Hours
Failure to track employee hours causes several problems. If you don't track employee hours properly, you could end up shortchanging your employees. Payroll mistakes underpayment means that your employees might not receive the overtime or commissions wages they were expecting. So you'll need to make payroll corrections and pay them.
Similarly, a payroll error overpayment benefits the employee, and it can be tricky getting your money back. According to the payroll discrepancy meaning, not tracking hours will lead to a difference between what's calculated and what should be on the employee's paycheck. To avoid this, it's better to use a time tracking app that accurately lets you know how many hours your employees have worked.
Outsourcing to the Wrong Payroll Service Provider
Payroll can be complicated and time-consuming, so it makes sense to outsource payroll processes. However, this can be a bad move if you choose the wrong payroll service provider.
If you're in the market for quality payroll services, be sure to do your homework and check that the company has a good reputation and can provide all the services you need.
Not Maintaining Payroll Records Properly
Poor maintenance of payroll records could mean keeping disorganized records, not updating records, or throwing out payroll records too early. All this can be disastrous for your business. It's usually easy for records to get disorganized if you still rely on manual payroll processing. Without a clean payroll, chaos and confusion can set it.
You may also find yourself on the wrong side of the law if you're not storing employee data for the time stipulated by Government regulations.
Missing Payroll Deadlines
It's crucial to have good timing when processing payroll, at least for the sake of your employees. Missing deadlines is one of those payroll mistakes that can be financially stressful to employees as they also end up making late payments. Therefore, an inconsistent payroll will result in unhappy and unproductive employees.
That's why it's a good idea not to wait until the last minute to start processing payroll. You can also ensure a smooth payroll process by using reliable payroll service or automating most of your payroll processes. For instance, you can automate payments to employees' bank accounts, so employees always get their wages on time.
Data Entry Errors
Manual data entry is sometimes unavoidable, even if you utilize payroll software. An example of a data entry error is when you mismatch employee social security numbers or enter inaccurate employee hours. Some of these data entry payroll mistakes can cause your business to lose a lot of money.
To avoid such costly mistakes, make sure you're using the right input method. You should also provide adequate training to reduce the risk of human error when processing payroll.
Failure to Utilize Payroll Software
Most payroll mistakes are caused by managing payroll data manually. However, this is unnecessary in today's age, where payroll can now be modernized and digitized. Instead of managing all payroll data manually, you can streamline processes with payroll software designed to meet your business's HR needs.
Utilizing payroll software comes with many benefits. For instance, you can save money by not hiring more payroll personnel. The payroll software will do all the heavy lifting and is not prone to making errors.
Using the Wrong Payroll Schedule
Choosing the wrong payroll frequency can result in dissatisfied employees or an overworked HR department. A higher payroll frequency can also affect your business's cash flow. The most common payroll schedules are weekly, biweekly, semimonthly, and monthly.
To ensure you're picking the right payroll frequency that works for your business, you should assess your needs and your employees' needs. Remember that most employees live paycheck to paycheck, so you'll need to strike the right balance so that employees don't have to wait too long to access their earned wages.
Failure to Report Taxable Forms of Compensation
It's common for employers to only report employees' base wages while failing to report other taxable forms of compensation.
The IRS wants all taxable items to be included in tax reports, and failure to do so can land you in legal trouble. Generally, it's best to assume that any form of payment that you make to employees is taxable unless it's specifically exempted by law.
Taxable forms of compensation you need to include in tax reports include advances, expense reimbursement, and cash prizes and awards.
The Final Word
Knowing which mistakes to watch out for will help you stay on top of payroll. This will keep your business legally compliant and your employees happy. So go over these ten payroll mistakes and plan ahead to avoid the negative consequences of payroll errors.