Payroll errors can occur due to various factors which may include manual data entry, misinterpretation of regulations, and inadequate record keeping, to name only a few. Payroll errors can lead to financial and legal repercussions. As such, it is crucial for businesses to ensure payroll accuracy and compliance.
The following are among the most common payroll errors and tips on how to avoid making them.
Incorrect Data Entry – is one of the most prevalent payroll errors. Entering incorrect information such as hours worked, hourly rates, or employee details can result is inaccurate pay calculations and tax withholdings. Automated timekeeping systems help to ensure accurate pay data is collected and entered. It is also important to double-check any data entry, establish standardized procedures, and train payroll staff. Monitoring payroll reports, staying informed about current payroll regulations, and conducting regular audits are also best practices.
Missed Deadlines – Failing to process payroll on time can lead to late payments or penalties. This impacts employee satisfaction and compliance with labor laws. Establish a clear payroll schedule with specific dates for each step of the payroll process including data collection, data processing, and payment. Inform employees about the payroll schedule, pay dates, and set reminders for deadlines. Encourage employees to submit accurate and timely attendance records and any other relevant data.
Overtime Calculation Mistakes – Calculating overtime correctly can be challenging, especially with varying overtime rates and rules. Errors in calculating overtime pay can lead to underpayment or overpayment of employees. It is important to, first, understand overtime laws by being familiar with federal, state and local labor laws governing overtime. Different regions may have specific rules regarding overtime eligibility, rates, and calculation methods. Utilizing an automated timekeeping system helps to track the hours worked and applicable rules, reducing the risk of making overtime calculation mistakes. Classifying employees correctly as exempt or non-exempt based on their job duties is also important as misclassification can lead to incorrect overtime calculations.
Employee Misclassification – Misclassifying employees as independent contractors or vice versa can lead to incorrect tax withholdings and non-compliance with labor laws. Be familiar with criteria used to determine employee status versus independent contractor status. Key factors include the level of control the employer has over the worker’s tasks, the worker’s level of independence, and the nature of the working relationship. Seek advice from legal counsel or a labor law expert to understand the specific laws and regulations governing worker classification, review job descriptions and contracts, evaluate behavioral control, and financial control.
Benefits and Deductions Errors – Mistakes in calculating benefits, such as vacation pay, sick leave, or retirement contributions can result in discrepancies in employees’ payroll. It is important to maintain updated employee records and any changes to their status such as promotions, salary changes or leaves of absence. Ensure employees are eligible for benefits and have met the criteria set forth by the organization. It is always important to double-check deduction amounts when setting up deductions for employees to ensure the correct amounts are being withheld from their payroll.
Tax Withholding Errors – Incorrectly calculating and withholding federal, state and local taxes can lead to tax compliance issues and potential fines. It is imperative to stay current with federal, state and local tax laws that pertain to payroll withholding. Verify employee information regularly, understand W-4 forms, which employees use to indicate their withholding allowances, and process correctly per employees’ requests. Review tax tables regularly as these dictate the percentage of taxes to be withheld based on employee’s income and filing status.
Inaccurate Record Keeping – Poor record keeping can result in missing or incomplete payroll information, making it difficult to reconcile payroll data and comply with audits. Establish standardized procedures, train payroll staff, double check data entry and reconcile payroll regularly while also maintaining organized files can significantly reduce the likelihood of inaccurate record keeping, ensuring payroll data is reliable and compliant.
Failing to Account for Bonuses and Commissions – Not including bonuses, commissions, or other variable payments in payroll calculations can lead to underpayment of employees. Be sure to establish a clear bonus and commission policy that outlines how bonuses and commissions are earned, calculated, and paid. Communicate these policies to employees to avoid misunderstandings and document with agreements or contracts. Integrate these metrics into the payroll system, double check calculations to ensure the correct amounts are being paid and remember to withhold the appropriate taxes. Different tax rules may apply to supplemental income like bonuses.
Overlooking Payroll Deductions – Errors in deducting employee contributions for benefits like health insurance, retirement plans, or wage garnishments can cause issues for both employees and employers. Create a comprehensive payroll deductions list that includes taxes, benefits contributions, retirement plans, garnishments and any other voluntary deductions. Be sure to maintain accurate employee records, use an established payroll calendar and reconcile payroll records.
Incorrect Bank Transfers – Mistakes in bank account information or incorrect transfer amounts can lead to delayed or misdirected payments. Always double-check the bank account information of each employee before setting up a new direct deposit payroll. Ensure the account number and routing number are accurate. Utilize a direct deposit form and require employees to fill it out and sign the authorization. This form may also be used when employees change bank account information.
Failure to Comply with Labor Laws – Not keeping up with changes in labor laws and regulations can result in con-compliance penalties and legal issues. Stay informed. Regularly review and stay up to date with all federal, state and local labor laws that apply to your business. Labor laws can change so it is crucial to be aware of any updates or new regulations. If you’re unsure about specific labor law requirements or face complex employment situations, consult with an employment attorney for guidance and advice.
Termination Errors – Failing to properly process payroll for terminated employees, including final pay and accrued benefits, can lead to disputes and potential legal claims. Create a termination checklist that outlines all of the necessary steps and tasks to be completed when an employee is terminated. This helps to ensure nothing is overlooked during the process. Double check that all necessary deductions and withholdings are appropriately applied to the final paycheck. Provide a termination document outlining the details of the termination including the final paycheck amount, benefits contribution, and any relevant termination information.
To avoid these common errors, businesses should consult with our payroll professionals anytime there is a question or uncertainty. Taking the time to develop a payroll check list, conduct regular audits, train payroll staff, and stay updated with labor laws and regulations help to ensure accurate payroll processing and avoid costly mistakes.
SDP payroll professionals assist our clients with payroll, workforce management, benefits administration, and human resources needs. To get started or learn more about these solutions, simply contact us today.
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*Southland Data Processing, Inc. (“SDP”) is not a law firm. This article is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other SDP materials does not create an attorney-client relationship. SDP is not responsible for any inadvertent errors that may occur in the publishing process.