Top 7 Payroll Mistakes to Avoid and How You Can Prevent Them

Innocent payroll administration errors can have serious consequences. Lean on these best practices to ensure a smooth and compliant process for your business.

Managing payroll effectively is a critical task for any employer. Mistakes in payroll can lead to significant issues, from employee dissatisfaction to legal complications. However, the good news is that most payroll errors can be avoided with the right knowledge and processes in place. Below, we’ve compiled the top seven payroll mistakes that businesses commonly face and provide practical tips on how to prevent them:

1. Misclassifying Employees

One of the most frequent payroll mistakes is misclassifying employees. Misclassifying employees as exempt when they should be non-exempt or treating them as independent contractors rather than employees can lead to improper pay, missed benefits, and legal repercussions.

How to Avoid:

• Understand Classification Criteria: Familiarize yourself with the criteria for employee classification based on federal and state labor laws.
• Regular Job Role Reviews: Periodically review job roles to ensure employee classifications remain accurate.
• Consult HR or Legal Experts: When in doubt, seek advice from HR or legal professionals to ensure proper classification.

2. Incorrectly Calculating Overtime

Miscalculating overtime is another common payroll pitfall. Underpaying employees due to incorrect overtime calculations can lead to labor law violations, employee dissatisfaction, and reputational repercussions.

How to Avoid:

• Know the Laws: Be aware of both federal and state regulations governing overtime.
• Use Reliable Payroll Software: Implement payroll software that accurately calculates overtime based on hours worked.
• Double-Check Overtime Calculations: Regularly review calculations to ensure they are correct.

3. Missing Payroll Deadlines

Missing payroll deadlines not only frustrates employees but may also result in penalties and legal issues. Many employees rely on receiving their wages on time in order to cover routine expenses and maintain their financial wellness, so delayed payments can significantly damage trust and harm retention.

How to Avoid:

• Create a Payroll Calendar: Set up a detailed payroll calendar with all critical deadlines.
• Automate Payroll Processing: Use payroll software that automates the payment process to ensure timeliness.
• Plan for Contingencies: Have a backup system in place in case of unexpected issues, such as system failures or holidays.

4. Inaccurate Employee Data

Errors in employee data, such as incorrect Social Security numbers or addresses, can complicate tax filings and benefits processing, leading to delays and potential fines.

How to Avoid:

• Thorough Onboarding: Ensure that employee information is manually verified during the onboarding process.
• Regular Data Audits: Periodically audit employee records to ensure that all data is up to date.
• Encourage Employee Updates: Send routine and proactive reminders for employees to regularly update their personal information, especially when they move or experience life changes.

5. Failing to Keep Up with Tax Regulations

Tax laws and regulations can change frequently, and failing to stay current with these changes can result in non-compliance and financial penalties for your business.

How to Avoid:

• Stay Informed: Subscribe to updates from the IRS, state tax agencies, and other relevant bodies.
• Attend Educational Seminars: Participate in payroll or tax-related webinars, workshops, or training sessions.
• Consider Professional Help: For more complex tax issues, consider hiring a tax professional to manage compliance.

6. Not Keeping Proper Payroll Records

Failure to maintain accurate payroll records can lead to problems during audits or when resolving payroll disputes. Inadequate record-keeping may also make it difficult to meet regulatory requirements.

How to Avoid:

• Maintain Detailed Records: Keep comprehensive records of all payroll transactions, including timesheets, wage calculations, and tax withholdings.
• Store Securely: Ensure payroll records are securely and redundantly stored, either digitally or physically, and can be easily retrieved when needed.
• Follow Record Retention Guidelines: Adhere to record retention guidelines as stipulated by the IRS and other regulatory bodies.

7. Errors in Handling Employee Benefits and Deductions

Improperly managing employee benefits and deductions, such as health insurance, retirement contributions, or wage garnishments, can lead to payroll discrepancies and tax issues.

How to Avoid:

• Utilize Accurate Payroll Software: Use software that can track and calculate employee benefits and deductions automatically.
• Review Benefit Plans: Regularly review the benefits and deduction policies to ensure accuracy.
• Clear Communication with Employees: Communicate clearly with employees about their benefits and any changes that may affect their paychecks.

Managing payroll is a complex process, but with the right tools and practices, you can avoid these common mistakes. Staying informed about relevant laws and regulation, using accurate automated systems, and regularly auditing your data collection processes will ensure accuracy, timeliness, and compliance. By following these best practices, you can maintain a smooth payroll operation, keep your employees satisfied, and steer clear of costly legal issues.

OneDigital’s payroll administration services provide your company with the insight, guidance, and dedicated support of an experienced team of certified payroll and HR professionals. Whether your payroll needs are simple or complex, our experts are adept at handling all aspects of payroll with ease and efficiency.