Payroll Mistakes: How to Avoid and Fix Common Errors

Orlando Aloysius Battista famously said, “An error doesn’t become a mistake until you refuse to correct it.”  As a chemist, he would know a thing or two about trial and error, as well as making mistakes.  Although payroll may not be as challenging as rocket science or chemistry, it isn’t something you can do on autopilot, either.  Payroll requires time and attention, and if you aren’t careful, you could easily make numerous payroll mistakes.

Since no one is perfect, you will inevitably make errors.  So, let’s identify how to avoid and fix them before they become huge payroll mistakes.

Payroll under a Microscope

If you are a pro at processing payroll, then you probably could write this section yourself.  However, if you are new to payroll, then you deserve a little debriefing about what you are getting yourself into.

Essentially, payroll is the process you go through to compensate your employees, and keep a record of what you have paid them.  Payroll can be relatively simple or it can be quite complex.  If you only pay subcontractors, then you probably won’t calculate or withhold taxes from their paychecks.  Conversely, if you are paying employees, then you will need to calculate gross-to-net wages, and you could have numerous other deductions as well.

Your First Payroll Mistake – Employee Misclassification Errors

Image of a W-2 form, which is a common payroll mistake when employers give a 1099 instead.

While you might be tempted to ask how you can get out of the tax and deduction pieces, don’t.  Cutting corners to simplify payroll would be your first mistake, and it would be a big one.  Specifically, you should avoid misclassifying employees.  In other words, you must pay employees appropriately based on employee type.  For example, you can typically pay subcontractors or 1099 workers straight wages.  That means you are not responsible for withholding or paying taxes on their behalf.  On the other hand, you will pay W-2 employees gross-to-net earnings. 

Now, it may seem like a pain, but managing the tax and deduction pieces could actually help you retain employees.  This is because taking responsibility for taxes removes the liability from employees.  Furthermore, deductions are typically due to fringe benefit offerings, and fringe benefits make employees happy.

Still, if you make a mistake classifying employees, get it right in the next pay period.  Classify employees appropriately, and then make up any difference in withholdings so that their W-2 or 1099 will be correct at the end of the year.

Your Second Payroll Mistake – Data Entry Errors

Another important thing to pay attention to is the way you are keying your employee information.  Making data entry errors could result in all kinds of problems.  So, don’t be lackadaisical.  Specifically, be mindful of double checking name spellings, social security numbers, and address information.  Also, keep up with changes to employee information.  If you have an employee self-service option, remind employees to utilize the portal to keep their information current.  If their address is incorrect, for example, their W-2 could be sent to the wrong place at the end of January.

Then, if you make a mistake with data entry, fix it right away.  Don’t put off updating employee information, as you could easily forget to take care of it.  Make correcting misinformation a top priority.

Your Third Payroll Mistake – Ignoring Regulation Updates

Listen, it’s understandable that you probably have a million things on your to-do list each day.  So, checking the IRS website might be one more thing you don’t want to add to that list.  Nevertheless, it’s important to stay in the know with payroll tax regulation updates. 

Still, if you find out you were in the dark about a new regulation, take the proper steps to get current.  Then, make sure you are receiving information in an organized way.  However, you don’t necessarily need to check in with the IRS.  If you have a trusted payroll provider, they will likely push out notifications or have a blog you can subscribe to, which will provide necessary information.

Your Fourth Payroll Mistake – Tax Errors

Now, this one is a biggie.  A fast way to get you in deep trouble is to make mistakes where taxes are concerned.  While there are many ways to mess up taxes, here are three that are quite common:

  • Miscalculating withholding amounts – Be careful to make sure you are using the correct tax rates when calculating FIT and FICA.
  • Taxing fringe benefits incorrectly – You will need to know which of your fringe benefits are pre-tax, and which are after-tax deductions.
  • Missing tax deadlines – Make sure to put all tax deadlines on your calendar so that you make payments on time.  Remember that you are responsible for your business tax payments as well as those for employees.

If you make a mistake, find out what the difference is and make up for it on the next pay run. Remember that your trusted payroll provider will handle all of these items for you, should you decide to outsource your payroll in order to avoid payroll mistakes.

Your Fifth Payroll Mistake – Trashing Records Too Quickly

Finally, you probably go through some kind of spring cleaning or de-cluttering process periodically.  We get it.  Still, avoid trashing payroll records too quickly, which would be a big mistake.  From the I-9 to W-2s, each document has a certain length of time that you are required to hold on to it.  Be aware of how long you must keep each, otherwise you could find yourself in a pickle if someone requests the information, or if you are audited.

Still, if you accidentally tossed something too soon, there is a possibility that you have it backed up somewhere.  Think through the places where you store records, and see if you can recover them.  Then, get organized, labeling each virtual folder with information about the length of time you need to keep the records.

Avoiding Future Payroll Mistakes

Now, we can’t emphasize enough that you will make mistakes.  Nevertheless, that is no reason to be careless.  The best way to help prevent future mistakes is to get organized and stay organized.  Also, it’s never too late to get organized, despite how many mistakes you’ve made in the past.

Something else to consider is that if you feel like you chronically make payroll mistakes, you can always outsource your payroll, which will take one more thing off your plate.  That would be an easy fix.

Don’t Let Payroll Mistakes Define You

At the end of the day, your goal is to operate your business, and compensate your employees accurately and in a timely manner.  You can accomplish this by doing your best to avoid common payroll mistakes.  However, should you make an error, take Mr. Battista’s advice and fix the error so that it doesn’t become a bigger problem.  Finally, if you feel payroll is just too much for you to handle, remember that a qualified payroll professional will be happy to take on the task.  There is no reason to let payroll mistakes define you or your business.

Image of a worker celebrating because she didn't make any payroll  mistakes.

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This is not meant to provide legal counsel or advice. Every situation is different. Please contact an HR professional or employment attorney before taking any action.

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