8 Payroll Mistakes to Avoid

Effective payroll management entails ensuring you pay your staff the right amount on time and in compliance with your state’s laws. However, processing payroll is daunting and time-consuming, and you could be susceptible to making mistakes.

Payroll errors do not only result in losing time and money; you could also incur hefty fines from the Internal Revenue Service (IRS), not to mention losing your best employees, so you should steer clear of payroll issues. An effective way to avoid the said payroll errors is to familiarize yourself with what to watch out for. Read on for eight common payroll mistakes and how to avoid them.

1. Misclassifying staff

Most employers often classify independent contractors as employees and vice versa, which results in severe repercussions such as interests and penalties for unpaid taxes down the road. Take time to classify your employees correctly before adding them to your payroll. An effective way to avoid misclassification is to familiarize yourself with the difference between an independent contractor and an employee. Below is a rundown of the two:

a) Independent contractor

Independent contractors are professionals who run their organizations but also partner with other businesses. Independent contractors:

• Control when and where they work. Independent contractor also utilizes their supplies and equipment
• Get Form 1099-NEC at the end of the financial year
• Are not subject to overtime and minimum wage, among other FLSA requirements
• Complete Form W-9

b) Employee

Employees are professionals your company hires and to whom you pay wages. Employees:

• Work for an employer who controls when and where they work
• Subject to employment taxes
• Subject to overtime and minimum wage, among other FLSA requirements
• Get a Form W-2 at the end of the financial year

2. Failing to utilize payroll software

Most business owners fail to utilize payroll software to save on the initial investment amount. However, an integrated payroll system can help you save time and money in the long run, as it improves accuracy. It also allows you to maintain a small payroll department, automates tasks such as year-end reporting, and calculates holiday pay, bonuses, commissions, and expenses, to mention a few, with minimum effort. Visit pherrus.com.au to familiarize yourself with the different types of payroll systems to determine which one might be more valuable for your organization.

3. Failing to maintain proper payroll records

Proper record-keeping is critical in every organization, especially when it comes to payroll. You could be susceptible to tax filing mistakes, missing payments, or miscalculating overtime without accurate payroll record keeping.  You could also get in trouble during a process or audit review.

Be sure to put in place a solid strategy for organizing payroll records such as payroll taxes, gross wages, withholding forms, pay rate details, hours worked, benefits and deductions, time off information, and employee names and addresses. Consider investing in an automated payroll system to organize your payroll records for future reference. Outsourcing your payroll can also keep payroll record mistakes at bay.

4. Using the wrong tax rates

It is not uncommon for tax rates to change every year. When they do, the rate changes could result in payroll issues, especially if you do not keep track of the changes. If you use the wrong rate when filing your taxes, the state requires you to make up the difference in taxes you owe. You could also incur more interest on the taxes owed, late payments fee, and penalties. Monitor your state’s tax rate changes to avoid legal implications and penalties. The following are payroll taxes you should update your rates for:

• Social security tax
• Local income tax
• State income tax
• Federal income tax
• Federal unemployment tax
• State unemployment tax
• Medicare tax
• Occupational privilege tax

5. Miscalculating pay

Providing your workers with accurate paychecks is the backbone of an excellent professional relationship. However, it can be challenging to keep track of commissions, PTO, deductions, and overtime, to mention a few, when calculating pay. This could result in underpayments which can lower employee morale. You could also overpay the staff, hurting your company’s finances. The following are tips to avoid miscalculating employee pay:

• Calculate overtime pay accurately
• Keep up-to-date with your state’s tax rate changes
• Double-check your calculations, especially when handling the payroll process manually
• Understand how deductions work
• Invest in payroll software to ensure accurate calculations
• Outsource your payroll to a payroll company

6. Failing to send out tax forms

Most business owners get so caught up in various business tasks towards the end of the year that they forget to send out tax forms to their workers. However, tax forms such as Form W-2 must be sent to your staff by the 31st of January every year to ensure compliance with tax laws. If you neglect to send the tax forms or miss the deadlines, you could get penalized by the Internal Revenue Service. Consider setting reminders, marking your calendar, or leveraging payroll services to ensure you do not forget to send tax forms.

7. Missing payroll payment deadlines

Your staff expects to receive their wages consistently and on time each month. However, with the various payroll process steps, it is easy for companies to miss payment deadlines. This damages trust and gives workers the wrong opinion of your company. For this reason, ensure employees’ salaries always arrive at a predetermined period. You could set pay reminders or leverage full-service payroll software to ensure you consistently pay your workers on time. If you experience issues and need more time to remit salaries, notify your employees in advance.

8. Miscalculating overtime pay

Most employers often focus on accomplishing specific tasks when there is a big surge of work that they fail to track working hours. However, if you fail to compensate or reward your staff for overtime and extra hours, you lower their morale and attract hefty fines.

Use time-tracking and payroll software to help you and your staff monitor how long they have worked. This includes hours they rack up during break time, attending team-building meetings, among other work-related tasks outside office hours, or traveling between work sites. You can avoid miscalculating overtime wages or underpaying your workers by tracking working hours.

Endnote

A solid payroll management plan is critical to ensuring a good working relationship with your team and improving your company’s financial health. Familiarize yourself with the above mistakes and avoid them to increase your payroll management program’s efficiency.