Payroll management is a key component of a company's relationship with employees. Sustaining your workforce depends on it and mistakes can jeopardize that relationship.
[This article was originally published on January 10, 2017 and has been updated and revised.]
Payroll management is one of the consistent responsibilities and challenges for every business. HR and payroll staff must be aware of the continual changes in rules and regulations, any new and updated forms, and the multiple layers of compliance that is required at the federal, state and local levels.
In addition, payroll management can be impacted by internal changes with employees coming and going, changing vendors, classifying employees and independent contractors, and - occasionally - unexpected changes due to pandemics like COVID-19.
With all of these factors to contend with, many business owners are not confident with their payroll process. In fact, a recent survey showed that more than half of the businesses polled said there was room for improvement in their payroll processes.
Thinking About Your Payroll Management Process
Among the most common payroll issues noted in the same survey was "organizational inconsistency" in the payroll process, incorrect tax withholding, and over-and-under payments to employees. Along with these there is often employee misclassification issues and overtime miscalculations, as well.
One solution can be reputable and up-to-date payroll software that can help make your HR, payroll, and employee data management less overwhelming. However, if your data storage and manual payroll processes are not well organized, you are still susceptible to errors.
Not only can payroll process errors be costly, they can also add several days with unnecessary work for your payroll department. And this doesn't take into consideration the potential damage to employee relations and morale.
Knowing that your payroll process can be improved is a good start, but knowing specifically what needs to be improved can be more challenging. Here is a list of the top ten most common payroll management mistakes that typically occur in a business.
10 Costly Payroll Management Mistakes to Avoid
There are probably dozens of errors and mistakes that can - and are - made by the typical payroll department. Here is a list of ten of the most common problems with typical payroll management processes for companies doing payroll in-house:
1. Administrative Staff
Many businesses, especially smaller ones, still carry out their payroll process in-house and manually. Often, the payroll staff is overworked. A manual payroll system typically requires a great deal of paperwork and a manual process also creates an administrative burden for your HR staff. Errors in data entry, for example, can create payment issues and the misapplication of rules. Being understaffed leads to mistakes.
2. Payroll Documents
A common problem is one of simply keeping all of your important payroll and employee records and information organized in an effective and accurate manner. Sometimes it is simply a matter of work flow: not keeping files and documents in a central location or creating uniform filing processes. A typical issue is storing and organizing paper checks, for example.
3. Software and Payroll Setup
A troubling reality about technology is that not all payroll programs are compatible. For example, the program used for your employee profiles or records may be different from the system you use for pay and benefits. For some companies this is compounded with incompatible programs used for employee performance. Too often, the systems for setting up a payroll process leads to mistakes and errors.
4. Employee Absences
Having to manually track your employees' vacation and sick days is a task that has great potential for mistakes. Using paper time cards and even simple digital time sheets can cause a company to be prone to misuse and unintended errors. In addition to the payroll, tracking which employees are not available due to various types of absences is critical for effective planning and optimum productivity.
5. Payroll Deductions
For most businesses and payroll staff, processing employee payroll deductions is probably one of the most complex parts of the payroll process. Because of the sheer number of both state and federal laws that apply to deductions, it’s easy for smaller businesses and HR departments to make errors. In addition to being a complex task, it also one of the common areas for mistakes during payroll processing.
6. Overtime Rules
Both federal and state laws require most employers to pay employees overtime for hours worked above the normal 40 hour work week. While the specifics can differ depending on the state and even the locale, overtime generally consists of an additional 50 percent of the employee’s typical hourly wage. However, because of the varying statutes and exceptions that overtime laws provide for, this is a payroll process that is prone to mistakes.
7. Court- Ordered Garnishments
Though not uncommon, the infrequent occurrence of court orders requiring garnishments from employee's income means the potential for errors. In these situations, the employer is required to fulfill the court’s terms for an income garnishment. Failure to do so, or to do so properly, leaves the company subject to penalties.
8. Regulatory Compliance
As noted at the beginning of this post, payroll rules and regulations change. Almost annually there are significant changes made to how payroll is processed either on a federal level or state level. While businesses typically strive to stay updated with regulatory changes that may occur, too often the overwhelming amount of information leads to compliance gaps.
9. Employee Classification
Many small businesses make use of different types of workers. This can include permanent part-time employees, temporary employees, freelance contractors and vendors. This variety in worker types and classifications can often lead to payroll issues.
It is critically important for a company’s workers be classified correctly for tax purposes, since misclassification can result in not paying their owed taxes. Failure to pay proper payroll taxes will likely lead to the IRS requiring the business to pay taxes on income paid to employees as well as fines and penalties.
10. Payroll Tax Deposits and Payments
Businesses understand that tax deposits are to be made on the 15th day of the month when taxes were withheld from employee paychecks. However, if payroll tax deposits and payments are late, the IRS will charge you fines and penalties. Typically these will be 0.5 percent of the tax amount due every month, and possibly an additional 25 percent penalty for tax deposits that are exceptionally late.
Mitigating the Potential Costs of IRS-related Payroll Process Errors
In addition to these common mistakes made by many small (and not-so-small businesses) another common oversight is with the proper and timely handling of IRS forms. Failure to issue IRS Forms 1099 and W-2 occurs far more often than one might think.
Forgetting or failing to issue Form 1099s, for example, is a common problem for companies that use outside firms or independent contractors to perform work for their business. You are required to issue an IRS Form 1099 to any business or individual who has been paid $600 or more in any calendar year and you must forward copies of the 1099 to the Internal Revenue Service.
Failure to do so can be costly with a business being fined with a $75 penalty for each 1099 that was not issued. In addition, the same company can be required to pay up to and additional 31 percent of the amount that was paid in federal taxes.
Failure to issue all your employees their IRS Form W-2 by January 31st is another common mistake, especially for small businesses, its seems. If the Form W-2 is sent out late, your company will be subject to an IRS fine of $50 for each W-2 that is not provided on time.
And it gets worse. If the IRS determines that your company “willfully neglected” to give employees W-2 forms, the can impose additional penalties and other measures, as well. And don’t forget employees who left or were dismissed during the tax year. For employees no longer working at your company, you must make sure that the letter containing their IRS Form W-2 is postmarked no later than January 31.
A Great Option for Your Payroll Management
Businesses have a number of options for their payroll functions. Software installed in-house, or cloud-based programs, can provide good alternatives. But if you really want the full benefits available to you then outsourcing to a provider like Accuchex can still be the best decision.
In addition to the time and dollar savings, having the peace of mind of knowing that your payroll processes are being handled competently, accurately, and on time is a great reason to consider outsourcing.
On top of that, you can be assured that the accountability and liability for compliance rests with your vendor, freeing you from the constant pressure of staying fully informed and compliant with the ever changing - and growing - rules, regulations, and legislation.
Reliability, full-service options, and reputation are the hallmarks of a quality payroll management service provider.
If you are currently looking to invest in outsourcing your payroll management, get your Free Download: Payroll Outsourcing Guide to help you make an informed decision or call Accuchex Payroll Management Services at 877-422-2824.