5 Common Payroll Mistakes and How to Help Prevent Them

Quick look: Payroll may seem straightforward on the surface, but behind every paycheck are numerous calculations, deadlines, and compliance requirements that require careful attention. Here’s a look at some of the most common payroll mistakes small and midsized businesses (SMBs) run into, what’s at stake when they happen, and best practices to help minimize them.

Did you know that the average employer makes 15 payroll corrections per pay period? Payroll involves countless calculations, so occasional adjustments are more common than many businesses realize. For SMBs, where resources are often stretched and employee relationships are especially important, maintaining payroll accuracy can have a big impact on both operations and the employee experience.

Here’s why getting payroll right matters:

• Compliance considerations: Payroll tax requirements are complex and errors can result in penalties or additional administrative work. In fiscal year 2025, the IRS assessed over 1 million penalties related to federal employment tax deposits, totaling nearly $118 billion.
• Lost productivity: Resolving payroll issues takes time that human resources (HR) teams could otherwise devote to more strategic initiatives. Employees may also lose focus when they have to spend time addressing paycheck discrepancies.
• Employee retention: Timely, accurate pay plays a key role in the employee experience. In fact, research shows that just two payroll errors are enough for more than half of workers to consider exploring a new job.

Fortunately, with the right knowledge, processes, and support, payroll can become one less thing to worry about.

5 common payroll mistakes to watch for

While payroll processes vary, certain issues tend to surface time and again, and recognizing them is the first step to avoiding them.

1. Miscalculating pay

Pay miscalculations can result in employees being under- or overpaid, and include:

• Incorrect hourly rates
• Overtime calculation errors
• Missed deductions
• Delays in issuing a new hire’s first paycheck

Consider implementing time-tracking systems that sync directly with payroll to reduce manual entry. And if errors do happen, correct them quickly and communicate clearly with the affected employee.

2. Misclassifying employees

Misclassification continues to be one of the most complex areas of payroll administration. Between 10% and 30% of employers have misclassified a worker at some point, which can lead to back taxes, wage claims, and compliance penalties.

Here are two key classification distinctions for employers to note:

• Exempt vs. nonexempt: Under the Fair Labor Standards Act (FLSA), exempt employees (typically salaried professionals or managers) are not entitled to overtime pay. Nonexempt staff, generally hourly workers, must receive overtime pay for any hours worked in excess of 40 in a workweek.
• Employees vs. independent contractors: Employees are entitled to certain benefits and protections, including unemployment insurance and workers’ compensation, while independent contractors are self-employed and responsible for their own taxes and insurance.

With remote and hybrid work changing how teams operate, the worker classification landscape has become increasingly nuanced. When in doubt, consult legal counsel or the compliance team at your professional employer organization (PEO) before making the call.

3. Inaccurate time and attendance tracking

Payroll accuracy starts with correct timekeeping. It’s important to remember that compensable time can include travel between work locations, required training outside regular hours, certain company events, etc.

Automated timekeeping systems that integrate directly with payroll can reduce time-tracking errors and simplify payroll processing.

4. Missing payroll or tax deadlines

Employees expect to be paid accurately and on time. Likewise, tax filings and deposits must be submitted according to federal, state, and local requirements. Missed pay dates can create unnecessary administrative headaches and increase the likelihood of penalties from the Department of Labor. Repeat violations can also trigger audits and potentially damage your employer brand and reputation.

Similarly, tax-related mishaps can cause the IRS to charge penalties for late deposits, failure to file, and failure to pay, and missed state deadlines add another layer. Setting automated reminders or using payroll software to track due dates can help avoid this.

5. Maintaining incomplete records

The FLSA requires employers to retain payroll records for at least three years. Those records should include:

• Hours worked per pay period
• Pay rate and salary details
• Gross wages and net pay
• Payroll dates
• Tax withholdings and payroll tax filings
• Benefits deductions

Inaccurate or incomplete records can complicate audits, tax reporting, and employee inquiries.

How to prevent payroll errors

While no process is perfect, here are three strategies to minimize payroll challenges and keep your business running smoothly and compliantly:

1. Stay current on payroll regulations

Federal, state, and local payroll laws are constantly changing. Designating someone to monitor regulatory updates, or partnering with experts to manage them on your behalf, is critical to maintaining compliance.

2. Audit your payroll processes regularly

Routine audits can catch problems before they become penalties. Review employee records, payroll reports, and tax filings on a consistent schedule, and remedy any issues immediately. One study revealed that approximately half of companies have incurred compliance penalties in the last five years, underscoring how quickly gaps can become liabilities.

3. Partner with a PEO

For many SMBs, payroll complexity can stretch internal resources. Partnering with a professional employer organization (PEO) like ExtensisHR provides access to payroll specialists, compliance expertise, and integrated technology, without the internal overhead.

Also, as an IRS Certified PEO (CPEO), ExtensisHR has undergone rigorous vetting, including audits and ongoing monitoring to ensure compliance with federal and state payroll requirements, employment law, and worker classification rules.

What ExtensisHR payroll support looks like

By outsourcing payroll to ExtensisHR, you can offload administrative burden while receiving a full suite of payroll services, including:

• A dedicated Payroll Specialist
• Payroll administration and processing
• Tax filing and W-2 preparation
• Garnishment management
• Work Opportunity Tax Credit (WOTC) processing
• Tax credit and economic/workforce grant support
• Role-based security access
• Work Anywhere® technology platform with employee self-service to access paycheck details, history, and deductions

And beyond payroll, ExtensisHR supports SMBs with competitive health benefits through large-group buying power, strategic HR guidance, recruiting, risk management, and more.

Learn more about ExtensisHR’s payroll services > >