Paying employees is crucial to keep your business running. Payroll is a crucial aspect of your business to safeguard your reputation and comply with payroll laws. However, payroll is a complicated process that requires the right tools, resources and know-how. Dealing with new employees, tax deductions, and public holidays is challenging, especially if you run several businesses.
Here are the 7 most common payroll mistakes you should avoid:
1. Poor Payroll Records
Record keeping is essential for future reference and compliance with labor laws and regulations. Failure to maintain payroll records is one of the common mistakes employers make. According to labor laws and most company policies, employers should keep payroll records, including tax information, wages and pay slips, for at least seven years. As a result, most companies use payroll software to maintain and generate reports, pay slips and other documents if need be. Some of the mistakes employers make include:
- Failure to update employees’ records regularly
- Outsourcing workers and providing false information
- Failure to gather or record employee information
- Failure to store employee information for at least 7 years
Employers should invest in automated payroll systems and hire an experienced payroll manager to ensure employees’ records are properly maintained, organized and updated.
2. Missing Tax Deadlines
After processing and paying employees, employers must submit the payroll information to relevant authorities to confirm tax and wages deduction. Usually, employers should submit this information within 2 days after paying employees. Missing tax deadlines is a serious problem that can attract penalties and late charges. Consider hiring a human resource manager and investing in an automated payroll system that can help avoid missing tax deadlines.
3. Misclassification Of Workers
It is important to correctly classify your employees to avoid fines, taxes and interest. Typically, companies should classify their employees as full-time or independent contractors/freelancers. Remember that misclassification of employees results in incorrect pay, which eventually leads to underpayment or overpayment. Misclassifying employees damage your company’s reputation and cost money and time in the long run. To avoid this problem, consider the following:
- Hire an experienced payroll management service provider to help classify workers.
- Avoid treating independent contractors like permanent employees.
- Hiring workers through a leasing company. Although this approach might be expensive, it is safer and helps companies save time and money.
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4. Miscalculating Overtime Pays
Overtime payment miscalculation is primarily associated with misclassifying employees. According to the Fair Labour Standards Act, employees should receive overtime pay for any hours they work past 40 hours a week. However, they cannot get overtime pay if they are classified as exempt. Be that as it may, it is the employer’s responsibility to calculate overtime pay accurately. Overtime miscalculation can result in penalties, interest and back pay. As a rule of thumb, you should always keep regular wages distinct from overtime pay to avoid confusion and miscalculations. With the help of a reliable payroll management service provider, you can rest assured knowing that they will carefully handle everything. Employers should familiarize themselves with overtime wage laws in their respective states to avoid making overtime pay mistakes.
5. Failure To Report All Employee’s Taxable Compensation
Besides salary, employees get bonuses, overtime, commissions, etc., depending on factors like location, employment position and employer/company. It is the employer’s responsibility to report all taxable compensation to the Internal Revenue Service. Common additional taxable earning employers should report include:
- Bonus awards
- Rewards, for example, travel awards, gift cards and gym membership
- Private medical insurance policy
- Company car or allowance
- Equity compensation
Remember that a gift to your employee might seem normal, but it can be deemed part of the payroll. If you are audited and such compromises are found, you can get tax filing penalties which might affect your financial situation and employees.
6. Payment Miscalculation
Whether you have permanent employees or independent contractors, miscalculating pay is a common mistake. Most people only realize they have made this mistake long after paying the employees, thus creating a long chain of problems trying to fix everything. Keep in mind that payment miscalculation also affects tax returns, bonuses and even overtime payments. Employers tend to:
- Overpay or underpay their employees
- Fail to pay new employees
- Make the wrong deductions
- Making wrong payments to employees on leave or with disability
If you are unsure about anything, it is crucial to consult a professional to avoid making a huge mistake. Also, consider hiring an accountant to help you handle payroll and finances.
7. Incorrect Tax Forms
Business owners should comply with tax laws to run their businesses smoothly. Besides missing tax deadlines, some employers submit incorrect employee information and wages. Employees use W-2 forms and other company-issued tax documents to pay their income tax. W-2 form includes the employee’s gross, taxable income and other crucial information, e.g., 401k. If employers or employees make a mistake, it can affect the normal running of the business. Employers should ensure that the HR manager has updated and correct employee information. To avoid legal issues, it is important to have accurate employees’ full names, addresses, tax file numbers, date of birth, payroll details, etc.
Payroll mistakes can prove costly to employers and employees alike. Besides incurring hefty fines and penalties, companies and business owners waste a lot of time trying to fix payroll mistakes. You can avoid payroll mistakes by:
- Carefully assessing your payroll manager to determine if they are professional and reliable. Consider hiring another payroll manager if you are paying fines and penalties for recurring payroll mistakes.
- Investing in an integrated payroll system. Nowadays, business owners invest in state-of-the-art systems to run their businesses and minimize payroll mistakes/errors. Although you must hire a human resource manager, relying on an automated system is crucial to avoid missing deadlines and miscalculations.
- Keeping yourself updated with the latest labor laws. There are numerous laws and regulations affecting payroll, overtime and taxes. If you are unfamiliar with any of the laws in your state, there is a high possibility of making a mistake. However, if you keep track of these laws and consult professionals regularly, you can avoid making the above-mentioned payroll mistakes.
Payroll mistakes can ruin your company’s reputation and impact your relationship with employees. If an employee has a concern, you should carefully assess the error, acknowledge it and correct it. It is crucial to notify all the parties involved, including government agencies, to avoid possible repercussions. With the help of a payroll manager, identify the problem and devise a solution to prevent the error from recurring. Finally, regular payroll audits are important to minimize payroll issues. The audit specialist should evaluate everything from your systems, technology and HR team. An experienced audit specialist will recommend areas you must improve to avoid future payroll errors.
Looking for accounting software for your business? Find MCP’s list of Accounting Practice Management Software, Accounting Software, Accounts Payable Software, Accounts Receivable Software, Billing and Invoice Software, and Commission Software.
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