8 Common Payroll Issues + How To Avoid Them

Wage garnishments add a layer of complexity to payroll processing that requires careful attention to detail. Different types of garnishments (e.g., child support, tax levies, student loans) may have different priority levels and maximum withholding limits. Additionally, federal and state laws often protect employees, limiting the amount that can be garnished based on their disposable earnings. Small-business owners striving for cost efficiencies may choose to do payroll themselves.

While this might sound like a lot of data, some states require even more. Tax rates are subject to change and need to be kept updated in your payroll. Making sure tax rates are in order will help you avoid owing taxes how should an llc fill out a w or making a payroll correction.

Failing to pay minimum wage

Misclassifying employees can result in incorrect pay, ultimately leading to overpayment or underpayment of wages. One of the most common misclassification errors is making an incorrect determination about whether an employee should be exempt from overtime. Per the Fair Labor Standards Act (FLSA), all employees must receive overtime pay for any hours worked over 40 hours per week, unless they what is the income summary account are classified as exempt. Classifying a non-exempt employee as exempt not only opens your organization to FLSA-related fines, but can also cause an employee to miss out on overtime earnings. Misclassifying employees occurs when workers are incorrectly labeled as contractors, part-time, or full-time employees. Each classification has different rules for taxes and benefits, so mistakes here can lead to fines or compliance issues.

If an employee has been underpaid, adjust the amount during the next payroll cycle and inform them of the correction. In this instance, you’d calculate the amount owed for the five hours of overtime and include it in their next paycheck. One of your US-based employees gets married and opts to change her last name. As a result, the employee’s tax documents are issued under her maiden name, leading to administrative issues during tax filing season.

Steps to Avoid Common Year-End Payroll Mistakes

While most payroll runs aren’t problematic, a lack of time to process payroll means sometimes things go awry. According to a study from Ernst and Young, one in five payroll runs contains at least one error. Furthermore, HR and payroll professionals receive an average of 30 pay-related questions from employees each pay period. Businesses must submit taxes to federal, state, and local authorities, at specified times and in designated forms. Such demands greatly amplify fiscal compliance and payroll administration obligations. There are a number of things you can do to help avoid making mistakes while processing payroll for your business.

1. Businesses — of all shapes and sizes — often make the same mistakes.
2. Getting a head start on tax filing allows your team to meet CRA requirements for tax forms, including Canada Pension Plan (CPP) and Employment Insurance (EI) contributions.
3. One of your US-based employees gets married and opts to change her last name.
4. Comprehensive records can be the difference between a quick resolution and a costly, drawn-out process in the event of a Department of Labor audit or employee dispute.

Multi-State Payroll Tax Compliance: A Guide for Employers

Alternatively, you can work with a payroll provider that does all of this for you — wherever your employees are based. Remote’s local, in-house experts stay abreast of all changes across the globe, and ensure that your payroll is fully compliant and accurate. Create a manual describing all of your payroll activities, including when payroll exceptions are made and the procedures for reviewing and approving changes. You should also create a policy for records management and retention. Doing so helps you comply with legal requirements, for example, the FLSA requirement to keep payroll records for up to three years. According to an American Productivity & Quality Center (APQC) study, organizations take between two and ten days to resolve a payroll error.

Offer a sincere apology for any inconvenience caused, and reassure the affected employees that steps are being taken to prevent future errors. You can also simplify and streamline this process by working with a payroll provider that provides time and attendance tracking as a core feature. Conduct a comprehensive review of your payroll policies to ensure they are standardized, documented, and communicated effectively. You can also conduct regular training sessions among your payroll team to apply these policies uniformly. If the delay is significant, manually offer adequate advances to your affected employees. You will also likely need to consult with your legal team if the cut-off dates are legally mandated (i.e., they should be paid every 14 days).

Moreover, in today’s interconnected world, news of payroll mishaps can quickly spread on social media, potentially damaging a company’s reputation and ability to attract top talent. By understanding these consequences, businesses can better appreciate the critical nature of accurate payroll processing and prioritize efforts to prevent errors. Incorrectly logged overtime hours can lead to improper overtime payments, which leads to corrections possibly spanning across multiple tax years. Correcting those errors takes time and can be incredibly unsettling for employees, whether they are underpaid or overpaid and have to return money to the company. Payroll software can organize and generate detailed reports on employee earnings, deductions, and benefits, making it easy to review everything before the year ends. This ensures all net working capital formula records are complete and correct and identifies any discrepancies.

If your company doesn’t have a reliable way to track employee hours or paid time off, your chances of making a payroll overpayment or underpayment mistake skyrocket. Not only can misclassification deny an employee important benefits and wages, it may also mean the government misses out on valuable tax dollars. These fines cost an average of $5,200, with the largest fine reported as $100,000.