Tips for Keeping Your Business Compliant and Productive
Quick look: Managing payroll can be complex and time-consuming, involving multiple tasks like calculating wages, withholding taxes, and filing reports. With so many moving parts, it’s no surprise that payroll mistakes happen and can have serious consequences for businesses. Here’s a look at some common payroll errors and practical tips for avoiding them.
Whether it’s a simple typo, a missed checked box, or a more complicated mistake, payroll errors can be costly for businesses, resulting in financial losses, compliance issues, and decreased employee morale. And unfortunately, over 30% of employers make payroll mistakes each year, which can lead to:
Government fines: The IRS penalizes employers who fail to comply with payroll tax regulations, including filing deadlines and payment requirements. The number of penalties collected each year can vary, depending on the number of violations and the severity of noncompliance. For example, the IRS collected nearly 7 billion in fines in 2021.
Lost time: Lost time can add up quickly. Fixing errors, reprocessing payroll, and correcting tax filings can take up valuable time and resources that could be better spent on other business operations. Additionally, employees may need to review their paychecks and work with HR staff to resolve issues, leading to decreased productivity and job satisfaction.
Employee turnover: Paycheck errors can put a hardship on employees, as 64% of Americans report living paycheck to paycheck. If mistakes aren’t corrected quickly or happen often, employees may look for work elsewhere.
Fortunately, payroll errors are easily avoidable with education, proper planning, and the right partner.
Five common payroll mistakes
With a process as multifaceted as payroll, there are many areas where organizations can inadvertently make mistakes. Here are some common payroll errors to watch for in your business.
1. Miscalculating pay:
Typical pay miscalculations include errors in calculating overtime pay, incorrect hourly rates or salaries, and mistakes in deductions for taxes and benefits. Other common mistakes include failure to account for paid time off or sick leave, inaccuracies in calculating commissions or bonuses, or missing the first paycheck for a new hire. These mistakes can result in under or overpaid employees, leading to compliance issues and potential legal liabilities.
Regular monitoring of employee time and attendance, as well as implementing time tracking systems can help reduce the risk of miscalculations. In the event of a payroll error, correcting it promptly and communicating with any affected employees to resolve the issue is crucial.
2. Misclassifying employees:
Up to 30% of employers misclassify their employees. Since the work environment has changed so rapidly in the last few years, employers need to be more diligent about understanding what defines the type of worker it’s using.
Two key elements employers need to distinguish between are:
- Exempt/Nonexempt: Are two different classifications under the Fair Labor Standards Act (FLSA). Exempt employees are not entitled to overtime pay and minimum wage protections due to their supervisory or professional responsibilities. Nonexempt employees are typically hourly workers who are entitled to overtime pay and minimum wage protections for hours worked over 40 hours in a workweek.
- Employees/Independent Contractors: Employees are hired by a business and are entitled to certain benefits and protections like health insurance, unemployment, and workers’ compensation. Independent contractors are self-employed individuals who provide services to businesses on a contract basis and are responsible for their own taxes and expenses.
It’s crucial for employers to understand the differences between types of workers. Misclassification can result in employers failing to pay employment taxes, including Social Security and Medicare, unemployment insurance, and workers’ compensation. Employers who misclassify workers may also be liable for back wages, overtime pay, and interest for unpaid taxes.
3. Incorrectly tracking employee hours:
If employees aren’t accurately tracking their hours worked, they may be underpaid or overpaid, leading to wage and hour violations and potential legal action. Additionally, businesses may face penalties or fines for failing to maintain accurate time and attendance records or for not paying overtime to eligible employees. Employers may also need to track travel time from one work location to another, training outside regular work hours, and team building and social events.
4. Missing deadlines:
Employees depend on the money they earn and should always be paid regularly and on an agreed schedule. Workers have a legal right to file a complaint with the Department of Labor to recover unpaid wages or back pay if not paid on time. Employers who miss pay deadlines can also face other fines, as well as damage to their reputation and employee morale.
Employers must also keep track of critical local, state, and federal tax filing deadlines. When an employer misses tax deadlines, it can result in penalties and interest charges from the IRS and other state agencies. Employers who repeatedly miss tax deadlines may face legal action, wage garnishments, or liens on business assets.
5.Keeping inaccurate records:
The FLSA requires employers to keep pay records for up to three years, including documentation of:
- Hours worked
- Pay rate details
- Gross wages
- Payroll dates
- Payroll taxes
- Withholding forms
- Benefits and other deductions
Inaccurate records can result in incorrect tax filings, wage and hour violations, and again, penalties from government agencies. Additionally, inaccurate records can cause confusion and mistrust among employees, leading to decreasing productivity and morale. To avoid these issues, employers should regularly audit payroll records and maintain proper documentation to ensure compliance.
Three strategies to identify and avoid common payroll errors
As daunting as these mistakes may seem, there are strategies, tools, and processes that can help combat them. Here are three practical tips to help minimize payroll errors and ensure accurate and compliant processing.
1. Stay up-to-date with payroll regulations:
Payroll regulations change frequently, so staying informed about any updates and changes that may impact your business is essential. Keep abreast of federal, state, and local payroll tax laws, employee classification rules, and wage and hour laws to ensure compliance.
2. Regularly audit payroll processes:
Frequently reviewing your payroll processes can help identify any errors or potential compliance issues before they become major problems. Conduct regular checks of employee records, payroll reports, and tax filings to ensure accuracy and compliance. If you identify any issues, take corrective action immediately.
3. Partner with a PEO:
SMBs often need more resources and expertise to manage the complexity of payroll. Partnering with a professional employer organization (PEO) like ExtensisHR provides small businesses with comprehensive services like calculating and processing payroll, managing tax filings and payments, maintaining accurate records, and upholding compliance.
Additionally, as an IRS Certified PEO (CPEO), ExtensisHR has undergone a rigorous certification process that includes audits and ongoing monitoring to ensure compliance with federal and state payroll taxes, employment law, and worker classification regulations. By partnering with ExtensisHR, businesses have peace of mind knowing that their payroll processes comply with the latest rules and that they will not face penalties or legal issues related to payroll taxes.
Avoiding payroll headaches with a PEO
By outsourcing payroll to ExtensisHR and our dedicated Payroll Managers, small businesses can reduce their administrative burden and ensure timely and accurate payroll processing with services including:
- Dedicated Payroll Manager
- Payroll administration
- Tax filing and W-2 preparation
- Work Opportunity Tax Credit processing
- Tax credit support
- Economic/workforce grant support
- PPP loan forgiveness
- HR reporting
- On-demand reporting
- Role-based security access
- Work Anywhere® technology platform
- And more
In addition to managing payroll and tax, ExtensisHR also provides big group health benefits, strategic HR support, recruiting, risk management, compliance, and additional HR resources to support employee satisfaction and retention.
Payroll management is more than just calculating hours and depositing the right amount of funds to employees. Contact one of our specialists today to see how ExtensisHR can help your business avoid costly payroll errors.