7 Common Payroll Mistakes and How to Avoid Them


Kiran Bajpai

Senior editor

Parul Saxena

Chief editor

Last updated: May 21, 2021


HRMantra : No. 1 In Payroll Software

Payroll is a crucial element of every business. It plays a key role in safeguarding your company’s reputation. At the same time, it keeps you compliant with all payroll laws.

Get Free Demo: Best Payroll Software in 2020

The payroll department of your company takes care of wage deductions, delivery of payroll checks, maintaining your employees’ and ex-employees’ payroll records, dates of employment, calculating overtime, bonuses, paid/unpaid days, reimbursements, pension, and much more. 

Nevertheless, payroll is quite a complicated process, and even the slightest payroll management mistake can put your business in jeopardy. Therefore, you must take all possible measures to streamline your company’s payroll to get your business up and running.

7 Common Payroll Mistakes and Ways to Avoid Them

In this post, we will shed light on the seven most common payroll mistakes and also suggest ways to avoid them. So here we go:

1. Missing Payroll Tax Deadlines Frequently

This is one of the most common payroll mistakes that can land you in deep trouble. Missing payroll tax deadlines can invite serious legal troubles that may end up tarnishing your company’s image. You may also have to pay hefty late charges and late payment penalties, which may cause undue financial stress. Additionally, it may cause distrust among your workforce. Therefore, if you want to keep some of the potentially serious penalties at bay, you should take all measures to remember your tax deadline.

How Can You Avoid This Payroll Error? 

Even the most experienced HR manager may end up missing payroll deadlines. Therefore, to avoid such payroll errors, consider investing in a comprehensive payroll system for remembering your payroll tax due dates. Payroll software comes with an inbuilt calendar tool and also enables you to set up automated payments. Thus, it offloads the burden of remembering tax deadlines from your shoulder and helps you adhere to a consistent schedule. Alternatively, you may also hire payroll tax filing service providers to stop struggling with payroll tax due dates. 

2. Failure to Maintain Clean Records

Of all payroll mistakes, failure to maintain clean payroll records may prove catastrophic to your business. The payroll department of your company is responsible for creating and maintaining the records of your employees. Maintaining a clean payroll not only proves beneficial to your employees and business but also keeps you compliant with company policies. However, HR managers often fail to maintain employee records accurately, thus causing chaos and confusion in an organization. Some of the most common record-keeping errors made by employers/HR managers are:

  • Not updating employee data regularly;
  • Inadequacy of employee information due to lack of updated employee information; 
  • Outsourcing payroll and providing fallacious employee details; and
  • Not storing employee data for long enough (as per Government requirements).

Failure to maintain clean payroll records can enhance your chances of getting sued or penalized by the Government. You may also be asked to provide evidence that you are not underpaying your workforce. What’s more, payroll errors can also result in underpayment or overpayment to your employees, which may end up damaging your business.

Also, Read: 7 Tips for Successful Payroll Management Services

How Can You Avoid Such Payroll Mistakes? 

Maintaining accurate payroll records is a challenging task. With an automated payroll system, you can streamline the process of maintaining your employees’ payroll records, thus, minimizing the chances of human error. Additionally, payroll software comes with useful tools such as timekeeping software, cloud-based storage, and direct deposits to help you save a great deal of time and effort. 

3. Absence of a Strong Backup

Your organization needs to have a robust payroll data backup. Have you ever imagined what you would do if your organization suffers a PC crash or your payroll manager suddenly quits your organization? The consequences could be disastrous if you do not take adequate measures to take backups of your payroll data in advance. 

How to Avoid this Payroll Mistake?

It is advisable to take backups of your payroll data and store them in a safe and secure location. Considering the benefits offered by cloud storage, a lot of businesses are nowadays investing in cloud-based payroll software to ensure the security of their payroll data. Cloud payroll software stores your payroll data in a cloud-based server and offers selective access features, thus enabling you to restrict access to sensitive data stored in the cloud. Moreover, since your payroll data is stored in the cloud, you can access the file anytime, anywhere, simply by logging in with your credentials. Last but not least, cloud-based storage provides you with the required level of preparedness during and after a crisis occurs.

Thus, having a reliable backup plan can help you in the event of a disaster. It also helps you ensure your employees are paid on time, even if your payroll manager is on leave.

4. Inaccurate Tax Calculations

Tax laws are always changing. Thus, if you have businesses in multiple locations, it may become difficult for you to keep track of the tax laws of different countries. However, you need to get your tax calculations right at any cost as paying wrong tax rates is a serious offense, which may get you penalized.

How can You Avoid Inaccurate Tax Calculations?

It is advisable to keep tabs on your employment tax rates every year so that you are aware of updated tax rates. Based on your location, make sure you keep an eye on local income tax, medicare tax, state income tax, social security tax, and so on.

At the same time, investing in comprehensive payroll software can help you prepare different taxes accurately and with ease. A sophisticated payroll tool is capable of considering the taxation rules of different countries and deducting tax as per the laws set by the government of different countries. What’s more, payroll software is also capable of generating different payroll forms. It also comes with tax computation capabilities to make your task easier. 

5. Inaccurate Classification of Workers

Misclassification of workers is one of the most common payroll mistakes. A company has two types of workers-full-time employees and freelancers or independent contractors. 

Employers often end up misclassifying these two types of workers. For example, some employers end up paying minimum wages or overtime wages to contractors. Additionally, some employers also end up misclassifying full-time employees as contractors as a result of which the latter end up missing out on wages. Consequently, you, as an employer, will owe them back pay. Misclassification of workers may also cause you to pay additional interest and penalties to the government.

How to Avoid Misclassification of Workers?

Misclassification of workers is a rampant issue that can prove costly to your business. Such errors are often considered intentional by the IRS for which businesses are heavily penalized. Therefore, to avoid such grave payroll errors, you need to take the following measures:

  • Don’t treat freelancers like your employees;
  • Consider hiring a reputable payroll management service provider to ensure accurate classification of workers and keep misclassification lawsuits at bay; and
  • Consider hiring contractors or freelancers via leasing companies to protect your company from misclassification penalties. Though hiring freelancers through leasing companies can be expensive, it will help you minimize misclassification risks to a great extent.

Also, Read: The Ultimate Payroll Compliance Guide: Step-By-Step

6. Miscalculation of Overtime Pay

Owing to the miscalculation of overtime wages, the number of litigations is going up by leaps and bounds. Thus, HR managers must follow appropriate guidelines for calculating overtime wages accurately as overtime miscalculations can prove costly payroll to your business. If you fail to pay accurate overtime wages to your full-time employees, you might have to end up paying penalties, interest, as well as back pay. 

How To Avoid Miscalculation of Overtime Wages?

As an employer, you should not mix up regular wages with overtime wages. To avoid miscalculation of overtime pay, check the overtime wage laws of your state, and make sure you strictly adhere to the laws. At the same time, if you want to relieve yourself from the burden of calculating overtime wages of your employees, consider hiring a payroll management service provider. Alternatively, you may also invest in feature-packed payroll software to handle such miscalculations.

Payroll software is capable of recording the time and attendance of your employees accurately. Thus, you can count on the software to calculate overtime wages so as to avoid costly litigation. 

7. Failure to Send Out Right Tax Forms

In order to run a business successfully, you need to comply with various tax laws, such as income tax, employment tax, excise tax, and much more. Your company must submit all taxes at a specified time set by the IRS. However, Payroll managers often end up creating a mess by filing payroll tax returns after the stipulated due date, thus getting penalized by the IRS. Moreover, submitting inaccurate amounts or employee information can also spell deep trouble for your business. 

How to Avoid this Payroll Error?

To avoid this common payroll error, make sure you send out the right tax forms to employees at the right time. Plus, ensure your payroll department has access to accurate data of your employees, such as full names of employees, their payroll details, tax file numbers, year of birth, current address, and so on. 

Managing payroll data manually makes room for human errors. Therefore, try utilizing an efficient payroll solution to streamline the process of managing payroll data so that you can stay away from the problem of paying hefty fines in the future owing to the negligence of your payroll team. 

Wrapping Up

These are the most common payroll mistakes picked by us. Payroll errors cannot be avoided completely; however, a bit of proper planning can help you keep such mistakes at bay, irrespective of the size of your company. 

Kiran Bajpai is Marketing Associate at SoftwareSuggest. Her expertise lies in Software Analysis. She can never get bored of reading books, especially those related to History and Politics.

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