Are You Making These 10 Common Payroll Mistakes? (Plus Best Practices You Need to Know)

Payroll is an essential HR responsibility that organizations need to get right, as common payroll mistakes could set your business back thousands.

A smooth payroll process in your organization is like restaurant service—when it’s good, you hardly notice it’s there. But, when it’s bad, it’s all you think about. That makes payroll one of the least appreciated, yet most important, functions within a business. Payroll, when done well, can keep employees satisfied and help you avoid legal consequences.

However, when payroll issues crop up, their impact can ripple across an entire company. Payroll corrections can be costly, and mistakes come at a price—from employee dissatisfaction to legal consequences.

This guide will identify common payroll errors and how to avoid them altogether. Fortunately, you can easily avoid the most common payroll errors with the right knowledge, proper planning, and the correct tools. BambooHR can help you to pay your people accurately with our payroll solutions.

The 10 most common payroll mistakes

With a process as complex as payroll, there are many opportunities for organizations to make errors. Here are some of the most common payroll errors to look out for in your company.

1. Misclassifying employees

The Fair Labor Standards Act (FLSA) provides benefits and protections for most employees—such as overtime pay and minimum wage. Independent contractors, however, are not given the same protections. Likewise, exempt and non-exempt employees also have different legal rights. Some organizations slip up and misclassify their employees as independent contractors or exempt employees.

This payroll error can not only deny people important benefits and wages, but it may also mean the government misses out on tax dollars. If left unchecked, the resulting underpayment or overpayment can turn into a costly payroll error. Over the last 25 years, large companies in the US—including FedEx and Microsoft—have been found liable for misclassification and had to pay settlements worth millions of dollars.

2. Miscalculating pay

With overtime, commissions, deductions, PTO, and more, payroll administrators have a lot to keep track of when calculating pay. For overtime wages, the general rule is 1.5 times an employee’s regular wage for any time worked beyond 40 hours in a workweek. States have different policies regarding overtime, but you must always comply with the rate that’s more generous for the employee.

Poor time-tracking capabilities can also contribute to this payroll error. If your company doesn’t have a reliable way to track employee hours or paid time off, your chances of making a payroll overpayment or underpayment mistake skyrocket.

3. Missing payroll deadlines

Timing is everything in payroll. But, with so many steps in the payroll process, missing a key deadline is all too easy resulting in a payroll mistake that you’ll need to fix later. Your employees count on your organization to deliver pay consistently and on time, so failing to stick to a reliable schedule can damage employees’ trust in your company. Not to mention, many states have pay frequency requirements.

4. Missing payroll tax deadlines

When it comes to payroll taxes, deadlines are no less important. Missing a tax deadline is a payroll mistake that can cost your company a considerable amount in late fees, penalties, or even legal costs. Knowing your timeline—both internal for paydays and external for taxes—is vital to a smooth payroll process.

5. Neglecting to send out tax forms

The end of the year (and the start of the new year) is a hectic time for payroll professionals. After a year of processing payments and taxes, organizations must send employees all the necessary tax forms. Employees need W-2 forms, while independent contractors who earned $600 or more need 1099s.

Failing to get the right forms to the right people on time isn’t just inconvenient for employees—it’s a payroll error that can also spell trouble for your company. Tax rates are subject to change and need to be kept updated in your payroll. Making sure these are in order will help you avoid owing taxes or having to make a payroll correction.

6. Failing to keep complete payroll records

Another critical area of payroll compliance is properly storing payroll records. The FLSA requires employers to keep three years’ worth of pay records. These records include hours worked, payment rates, payroll dates, and more.

Not only does this data keep your organization safe in case of future audits, but it also helps you run payroll more smoothly. Without complete, updated records, you risk miscalculating pay, misclassifying employees, and making other costly mistakes.

7. Tracking time inaccurately

Time tracking may be an essential HR process, but tracking time incorrectly results in another common payroll mistake: paying your employees incorrectly. It’s also important to ensure overtime is logged accurately and paid at the correct rate.

Time tracking tools can help HR teams keep up with administration and help you get a handle on payroll. They enable you to automate time and attendance so you can feel confident about paying your people correctly.

8. Getting employee details wrong

When completing payroll, HR teams must ensure that all employee data is accurate, including:

• Full name
• Date of birth
• Current address
• Employment start date
• Taxpayer identification code
• Payroll data

Get this wrong, and you have a costly payroll mistake that could cause problems with the IRS as these details must be correct when paying your team members. The right Payroll software will keep employee records in one centralized place, so you can keep on top of everything. This helps HR teams to stay compliant and ensures effortless employee data management.

9. Overlooking holidays

HR teams need to be aware of federal holidays, as they affect payroll. Holidays mean payroll may need to be processed earlier than expected to avoid delays and payroll errors, and they may impact your employees’ pay rates.
Keep an eye on which holidays on which your bank may be closed, so you can adjust timelines accordingly. For example, if the holiday falls on a Sunday, banks may be closed the following Monday. This means that payroll may not be processed until Tuesday.

Federal holidays to be aware of include:

• New Year’s Day
• Martin Luther King, Jr. Birthday
• Washington’s Birthday
• Memorial Day
• Juneteenth National Independence Day
• Independence Day
• Labor Day
• Columbus Day
• Veterans Day
• Thanksgiving Day
• Christmas Day
• Presidential Inauguration Day.

10. Not considering state-specific laws

Each state has its own laws regarding payroll, and these are subject to change. Your HR teams need to understand the nuances between states to ensure you’re abiding by local regulations. For example, there may be different legislation around minimum wages, overtime pay, or breaks and working hours.

Not knowing how the rules differ between states could be the difference between submitting accurate payroll and making costly errors. Don’t risk making this common payroll mistake and keep up to date on payroll laws across the US.

How to prevent common payroll errors

Preventing each error listed above requires a variety of strategies, but we’ve included our top suggestions. Incorporating these into your processes can help you catch the most common payroll mistakes before they happen, making the process faster, easier, and more accurate.

Invest in the right payroll services

The best way to keep payroll mistakes from disrupting your organization is to invest in compatible payroll services and an HRIS. The right HRIS will manage and update important employee information, like wages, hours, account numbers, and withholdings. It will then communicate those changes to your payroll system, eliminating the need for double entry.

At the same time, the right payroll software should sync with your HR system and automate the most time-consuming tasks. Payroll software makes it easy to run reports, file taxes, distribute pay stubs, and more.

Maintain payroll compliance

Many payroll errors happen when payroll admins don’t have enough information—or the correct—information around payroll compliance.

Laws and policies are always changing, and they can vary from state to state. So, it’s crucial your payroll team stays in the loop regarding current local regulations (especially if you have a national or global presence).

Doing some basic research and double-checking your assumptions can go a long way toward avoiding common payroll mistakes. For example, make sure you can answer the following questions:

• What’s the difference between exempt and non-exempt?
• Is this employee really classified correctly?
• What are the state regulations for this employee?
• How will we audit compliance when new regulations are released?

Run reports before processing payroll

If you have access to payroll software, running a few key reports before processing payroll can help you catch and prevent common payroll mistakes. We suggest running the following reports to make sure all your check amounts are correct:

• Deductions summary. Provides a summary of all deductions on every employee so you can double-check amounts.
• Payroll register. Allows you to see all payroll information in a helpful summary format.
• Cash requirement. Shows how much money your organization must have available to pay payroll, broken down into categories like wages, taxes, deductions, and more.

Keep a payroll process checklist

You can never go wrong with a tried-and-true checklist. Payroll admins have a lot to keep track of, even if they have software to support them. With a payroll process checklist, you can go through every step in detail, reviewing documents piece-by-piece to ensure accuracy.

You may also want to keep lists of all new hires, pay changes, deduction changes, and other updates in one central location, organized by pay period. Then, when you’re working on payroll for that time frame, you can review each list to ensure all the changes have been implemented accurately.

Common payroll mistakes FAQs

With so many moving parts, payroll can be tricky to get right. We’ve answered some of the most frequently asked questions surrounding the process and the most common payroll mistakes.

What is a payroll correction?

Payroll corrections are required when adjustments need to be made to amounts paid to employees. Poor payroll organization, like forgetting to account for vacation days, can cause the need for money to be added or subtracted from the original wage amount.

Sometimes your team may need to dig through historical data to rectify issues. This takes time and effort that could have been avoided if the mistakes had been caught early or prevented entirely.

How long does a company have to fix a payroll error?

While legal time frames differ depending on the state, the short answer is that errors should be paid promptly. Fixing shortages in payroll as soon as possible should help you avoid penalties. Labor laws require full payment for work completed, and most companies will either add the missing pay to the next pay period or cut a check between pay periods.

Who is responsible for payroll errors?

The employer is ultimately responsible for payroll mistakes. It’s your responsibility to make payroll corrections to fix any issues. Some payroll errors are violations of the FLSA and the Federal Insurance Contributions Act (FICA).

Litigation services and settlement agreements can also set your business back hundreds of thousands of dollars. So, it’s in your company’s best interest to avoid payroll errors from the start.

Improve your payroll process

Being aware of the most common payroll mistakes is a great first step to avoiding them altogether and maintaining a smooth payroll process. And while running a seamless payroll may sometimes feel like a thankless job, it affects many other elements of your organization, like employee satisfaction and even company culture.

Start perfecting the payroll process now so your company doesn’t pay for it later.