Payroll is complicated. Accuracy and timeliness are of paramount importance and there is no room for error. Despite this fact, mistakes happen and the price employers pay for these mistakes can be costly. Ramifications include: paying back wages and taxes and/or hefty fines and penalties, and in, some cases, even lead to prison time. Not to mention the hit to employee morale should their payroll be processed incorrectly.
Below are five of the most common payroll mistakes companies make. Ready to do your payroll right each and every time?
Incorrectly classifying employees
The proliferation of gig work has led employers of all sizes to increasingly hire independent contractors and freelancers. With this comes the employer responsibility to correctly identify each workers’ status as either an employee or as an independent contractor. Employers may unknowingly trigger risks of labor violation penalties and fines by improperly classifying individuals as independent contractors and be denying workers of certain employee benefits such as overtime pay, and minimum wage, etc.
The penalties for misclassifying someone as a contract worker may vary depending on whether the IRS and Department of Labor (DOL) determine the misclassification was unintentional or on purpose. Some examples of penalties include:
- Back taxes on the misclassified employee’s wages, including fines and interest
- Back unemployment and workers’ comp insurance, and in some cases back premiums for state-run insurance programs
- Two to three years worth of back pay to the misclassified worker for any work that was not compensated at applicable minimum wage and overtime rates
- If the employee sues then there are also attorney fees to consider
Paying the wrong amount for taxes
Paying too little, or too much, in payroll taxes is most frequently due to simple errors on tax forms. Making such small mistakes as an incorrect total or entering an amount on the wrong line can result in a snowball effect which complicates reconciling W2s with year-end tax returns.
In addition, tax rates can change. When you don’t stay on top of these updates errors happen, and, ultimately, can lead to you owing additional taxes.
Running payroll late
Things happen and sometimes payroll isn’t processed on time. Not only is this very upsetting to employees and a total morale crusher, but it can also come with penalties and fines.
Employers can also get into a sticky situation if they don’t issue a departing employee’s final check on time. Many states require final paychecks to be issued very quickly, sometimes even on the same day that an employee leaves. For more information download our State Final Paycheck Laws guide.
Using incorrect or outdated employee info
It is common for payroll and HR systems to not be integrated. As such, employers are left to manually enter or transfer data like wages, hours and account numbers from one system to another. And with more keying comes more errors. Additionally, common issues like incorrect addresses, name changes, or outdated hourly rates can cause problems with the IRS.
With ScalePEO, your payroll data is automatically integrated with HR, which means you don't have to rekey anything from one system to another. Not only do you save time but you decrease the risk of error.
Calculating overtime can quickly, and easily, get pretty confusing.
Per the Fair Labor Standards Act (FLSA) covered nonexempt employees must receive overtime pay at a rate not less than one and one-half times the regular rate of pay for hours worked over 40 per workweek. Seems simple enough so far, right? Well, employers also need to remember to follow any state or local overtime laws. For example, in states like California there are also rules for daily and seventh consecutive day overtime, as well as rules on double time.
While the above payroll mistakes are common, the good news is that employers don’t have to go it alone! Enlisting the help of a PEO to automate and manage payroll helps ensure employees are always paid on time. Integration between time and labor tracking with payroll and HR eliminates manual processing, avoids keying errors which cause incorrect data, and saves time. PEOs also stay up-to-date on employment regulations and can provide the resources employers need to stay compliant.
For more information on how ScalePEO can help you do payroll right, streamline your HR, and give your employees the benefits they’ve always wanted contact a member of our team today.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal advice. If you have any legal questions regarding this content or related issues, then you should consult with your professional legal advisor.
Editor's Note: This post was originally published January 23, 2019 and has been completely revamped and updated for accuracy and comprehensiveness.