Top 10 Payroll Mistakes (+Their Impact & How You Can Avoid Them)
From errors experienced by 1 in 4 employees to late paychecks at 32% of smaller businesses it’s clear payroll mistakes happen. As a business owner, mistakes like this can keep you up at night. Luckily, there are steps you can take to reduce the likelihood of payroll problems as well as minimize their impact on your employees and business. What payroll errors should you be aware of so you can avoid them? Let’s find out.
In this article, we’ll discuss the most commonly made payroll mistakes, the effect they can have on your company, and strategies to limit the likelihood of errors. After reading this, you’ll know the best way to protect your business to lower your risk, enhance compliance, and boost morale.
What are the top payroll mistakes to be aware of?
The payroll process can be error-prone, but keeping missteps to a minimum is crucial for the benefit of your employees and your business as a whole. The first step to avoiding mistakes is to be in the know about what they are.
Here are the top payroll mistakes to be aware of:
- Missing Deadlines
- Submitting the Wrong Tax
- Misclassifying Employees
- Using Inaccurate Employee Information
- Processing Payroll Late
- Paying Incorrect Amounts
- Not Making Timely 401(k) Contributions
- Failing to Keep Proper Payroll Records
- Not Handling Garnishments and Child Support Correctly
- Forgetting to Send Year-end Tax Forms
Payroll taxes are due to the IRS by specific dates, typically on a quarterly, monthly or semi-weekly basis. For example, federal payroll taxes generally have two deposit schedules – monthly and semi-weekly – based on your lookback period. And if you miss these deadlines, the penalties could be as high as 15 percent of the past due amount, plus interest. For state payroll tax schedules, check your local taxing authority so you don’t fall behind.
Submitting the Wrong Tax Amount
Some payroll taxes like Social Security, Medicare, and FUTA are fixed percentages of an employee’s wages while others depend on tax rates imposed by the federal and state governments. Either way, you’ll need to properly calculate the appropriate amounts, withhold them from your employees’ paychecks, and make timely deposits. Just like the fine for late deposits, the Failure to Deposit Penalty of up to 15% of the unpaid amount applies if your deposits are not in the right amount. To ensure proper calculation, many companies choose to outsource payroll to a third-party provider.
It’s critical to properly determine a worker’s status – employee or independent contractor – since whether they’re subject to tax withholding depends on it. The biggest distinction between W-2 and 1099 workers is the amount of control you have over them so be sure to view the IRS tests. Even if you bring someone on as a 1099 worker, it’s important to reassess their role over time. Since the role of a contractor may change and evolve the longer they work with your company, their classification may change too. Misclassifying employees, even unintentionally, is one of the top payroll mistakes to be aware of because of its steep financial consequences, including a $50 fine for each Form W-2 you failed to file on an employee, a penalty of up to 3% of the wages, plus up to 40% of the FICA taxes that weren’t withheld from the employee and up to 100% of the matching FICA taxes you should have paid
Using Inaccurate Employee Information
The IRS requires correct employee data when payroll is processed so be sure you have the right information like name, address, date of birth, hourly rates, bank account, and W-4 filing data when setting up a worker. And remind employees to let you know when their information changes. While you’ll need to make some of these edits such as entering a new pay rate, if your employees have self-service capabilities through your payroll partner, they can log in to provide updated information like a change of address or withholding amounts.
Processing Payroll Late
The Fair Labor Standards Act requires employers to pay employees promptly as do some states. And if you’re late, you risk civil money penalties. For instance, in California, employers must pay a penalty of $100 a day for an initial violation. Moreover, missing a payroll deadline can have a serious impact on employee trust, morale, and retention. In certain situations, this can prompt complaints that lead to a costly lawsuit or audit of your business. To avoid these issues, it may help to speed up and streamline your payroll process by moving away from manual scenarios and adopt as many automated services, including time and attendance, employee engagement, and payroll, as possible.
Paying Incorrect Amounts
Under both state and federal regulations, employers are required to pay employees for all wages earned and due, in accordance with the designated pay period. However, as far as payroll errors go, it’s not uncommon for employees to be overpaid or underpaid due to matters like withholding or overtime miscalculations. If you overpay an employee, you have the right to recover the amount but states may have specific rules for doing so. If you underpay, you’ll also need to follow the requirements for your state. For example, in Oregon, you can wait until the next pay period to correct the mistake if the amount is less than 5% of the total paycheck. A best practice is to use a payroll software or provider for accurate calculations.
Not Making Timely 401(k) Contributions
If you offer a 401(k) plan, you’ll need to make timely contributions. If not defined in your plan documents, deposits generally must be made as soon as possible after withholding the money from an employee’s wages – at the latest, the 15th business day of the month after the contributions are withheld. Otherwise, you risk penalties under IRS and Department of Labor rules. To avoid payroll mistakes related to untimely 401(k) contributions, establish a procedure that requires elective deferrals be deposited with or after each payroll and, if any deferral deposits are late because of vacations or other disruptions, keep a record of why.
Failing to Keep Proper Payroll Records
State and federal regulations require employers to maintain certain payroll records for at least 3 years and documents on which wage computations are based for 2 years. For example, under the FLSA, you’ll need to keep documentation about an employee’s work and time schedules and additions to or deductions from wages for 2 years. States may have even longer requirements; in New York, employers must keep more in-depth payroll records for 6 years. Set up policies for your company and proper storage guidelines to ensure compliance with the recordkeeping rules.
Not Handling Garnishments and Child Support Correctly
When debts such as child support, tax levies, or other garnishments need to be collected from an employee’s salary, you’ll need to make sure you’re withholding correctly and submitting payments per the remittance instructions. If you use a payroll service, notify them so they can ensure the garnishment is withheld and remitted to the proper authority. While the rules in each state vary on stopping child support garnishments, it’s best to keep withholding until you receive written authorization regardless of what an employee may tell you.
Forgetting to Send Year-end Tax Forms
Copies of Form W-2 have to be sent to your employees and the Social Security Administration by January 31 each year. In some cases, you may also need to submit a copy of each Form W-2 to your state tax authority. You’ll want to check with your department of revenue to learn your state’s filing requirements since some have different rules. You’ll also need to submit a copy of the forms to each locality where municipal tax was withheld during the year if you’re in a state with local income taxes. Set a reminder for yourself each year or, if you use a payroll service, they’ll handle this task for you.
How do common payroll mistakes impact my business?
While payroll errors are bound to happen, it’s essential that you address them as quickly as possible when an issue arises within your organization. Otherwise, you risk significant impacts to your business, including:
- Fines and penalties that can add up quickly if the errors aren’t addressed in a timely manner
- A wage and hour audit by either the federal or state Department of Labor that could result in fees
- Employee lawsuits stemming from violations of state or federal law
- Decreased morale due to missing or late pay
- Higher attrition as frustrated employees look elsewhere for a job
How can I avoid payroll errors?
As you can see, keeping your payroll error-free can be time consuming and complex. However, if you don’t do your best to manage and avoid payroll mistakes, the risks to your business can be significant. That’s why many companies choose to outsource payroll. By teaming with a professional provider, you’ll not only be able to get access to services like expert tax support, but because your process will be automated, you won’t have to worry about miscalculations or delays.