Are Payroll Errors Costing You Big Time?

It’s no secret that payroll errors cause employees immense financial and emotional harm. Employers, however, also face a considerable financial burden from habitual payroll discrepancies.

According to a study by EY, each payroll error costs a company $291 on average, and if your company regularly deals with these mistakes, you could‌ be losing thousands of dollars every year.

That might sound like a big price to pay for a few common payroll mistakes, but these discrepancies trigger a cascade of problems that come with their own expenses. Aside from the obvious upfront costs, such as overcompensating an employee, payroll discrepancies can cause other significant financial drains on a company. These range from an overworked HR department to complex legal issues, not to mention the long-term expense of damaging an employee relationship.

Understanding the extensive consequences of payroll errors can help you prevent these unnecessary expenses. Read on to learn more about the hidden costs of payroll mistakes and how you can avoid them when you run payroll.

The Hefty Cost of Payroll Errors

The indirect costs of payroll mistakes can sneak up on you quickly—what starts as an irritating issue with your payroll system can soon escalate into far-reaching challenges for your company.

Time and Labor

At its most benign, a payroll discrepancy is a time-consuming inconvenience. Every payroll mistake made needs to be corrected by HR personnel, which requires time and—ultimately—more money.

For example, the annual direct cost of an incorrect time punch is $71,705 per 1,000 employees. Now add to that the human labor cost of correcting the mistake, which is an additional $6,962 per 1,000 employees, or around 440 hours’ worth of work.

Annual Cost of an Incorrect Time Punch

Per 1,000 Employees

If your HR team is spending the equivalent of multiple work weeks fixing preventable mistakes, on top of other regular HR responsibilities, you’re looking at an overall increase in labor costs and a higher risk of employee burnout.

Employee Impact

One of the most underappreciated consequences of payroll errors is the emotional impact on the employee.

From an employee’s perspective, a payroll mistake can feel like a fundamental violation of trust. After all, an employee does their work with the expectation that they'll be compensated correctly and promptly.

Moreover, the majority of Americans are living paycheck to paycheck, meaning just one payroll discrepancy can lead to debilitating financial stress, such as missed mortgage or rent payments, increased credit card debt, and even food insecurity. For some, it can take years to materially and emotionally recover.

Not only will payroll errors affect employees’ mental wellbeing, but they can also hurt employee retention—in fact, many folks will begin searching for new jobs after just one or two payroll mistakes.

Legal Consequences of Payroll Errors

Payroll errors also cause expensive legal issues. An employer faces two legal fronts when it comes to payroll discrepancies: regulatory penalties and employee litigation.

Certain payroll discrepancies are violations of laws such as the Fair Labor Standards Act (FLSA) and FICA, as well as various other federal and state payroll tax requirements. These types of payroll mistakes can lead to severe fines. For instance, failing to properly pay for overtime work has a penalty of up to $1,000 for each violation.

The FLSA also gives an employee the right to privately file a lawsuit to demand back pay and additional compensation for damages and legal expenses. In the end, a lengthy litigation process and the eventual settlement agreement can end up costing hundreds of thousands of dollars.

The best way to remove the risk of these legal issues is to prevent payroll errors in the first place.

How To Avoid Costly Payroll Mistakes

Payroll errors can quickly snowball into a major expense, but with a few simple measures, you can save your company a lot of time and money.

Track Regulatory Changes

Staying up-to-date on the latest regulatory changes is essential to avoiding expensive payroll mistakes. Failure to comply with a new law, such as a minimum wage increase, can lead to complicated (and pricey) legal problems. While navigating these regulations might feel a little overwhelming, putting in the extra effort will protect you in the long run.

You can learn more about federal compliance obligations by going to Employer.gov, a resource provided by the US Department of Labor. Other helpful ways to stay aware of upcoming regulatory changes include setting up news alerts and following relevant government social media accounts.

If you have serious concerns about being in compliance with federal or state laws, always consult your legal counsel.

Choose the Right Payroll Solution

Your payroll platform makes all the difference. When you’re using unreliable software, or—even worse—piecing together multiple systems to create a payroll process, you’re vulnerable to both human error and technical issues.

To lower the risk of payroll discrepancies, you can use an all-in-one software that manages payroll, time tracking, and employee benefits, guaranteeing your payroll is accurate and streamlining your tax filing needs.

And it’s not just about logistics—better software means a better employee experience. A more reliable and comprehensive payroll software protects an employee’s financial stability, empowers them to have a deeper understanding of their pay and benefits, and strengthens trust in their employer.

Payroll is a significant responsibility for any company, but with the right platform, running payroll becomes easy, making payroll errors a thing of the past.