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4 Common Payroll Issues and How to Avoid Them

business.com editorial staff
business.com editorial staff

Handling payroll, even with the help of a payroll service, can still be complex.

Handling payroll can be a hassle for most HR employees. There are many problems that can arise while doing payroll. However, once the risk is acknowledged, they're typically easy to prevent. Here are four common payroll issues and how to avoid them.

Outdated payroll solutions

One investment you should make is a service that accurately tracks your workers' time in and out. Using an outdated or faulty system can cause an array of issues such as late payments or miscalculated overtime, which can cause a domino effect.

According to the Evolution of Payroll Technology Survey conducted by Kronos with the American Payroll Association, 29%of respondents said their payroll solution is 10 or more years old.

"Many payroll professionals find themselves in a challenging predicament," said Malysa O'Connor, senior director of Kronos. "They're forced to rely on outdated solutions that provide limited visibility into payroll's impact on overall organizational performance." 

According to Robin Schwartz, human resources professional at MFG Jobs, some payroll processing systems might not be reliable, especially when you're on a deadline. In other words, employees might be paid late, forcing HR to cut special checks outside of the regular pay period.

Additionally, many employees might hit overtime without intending to do so.

"Whether it's how the employee reports his/her time or how it is calculated, overtime can cause serious issues if not handled properly," said Schwartz. "Organizations need to put in place proper time-tracking software or systems to ensure HR is aware of overtime hours being reported. Organizations, even small businesses, should also consider investing in payroll software to ensure the proper calculation of overtime rates and accurate record keeping." [Interested in online payroll services? Check out our best picks.] 

Remote and freelance workers

There are varying policies for different types of workers and in different states or countries. Make sure you do your research so you clearly understand the rules and regulations.

"You may not be aware of the different laws in another state, such as minimum wage or tax requirements," said Nate Masterson, HR and marketing manager for Maple Holistics. "Before you hire someone out of state, make sure someone on your payroll staff is aware of the laws of that state. Perhaps your tech doesn't support cutting a paycheck for an out-of-state employee, so do a trial run first before officially hiring them."

Because more companies are drifting away from a traditional workplace, bridging the gap may require the help of an outside expert, added Lisa Kerner, operations manager at Fueled.

"It is unrealistic for one HR manager to achieve a thorough understanding of multiple country-specific employment laws, so it's sensible to rely on third-party experts and payroll companies to handle this," she said.

Time off

It's crucial to factor in paid time off or sick days to prevent mixups when handling payroll.

"Payroll is a complicated process, and it may be pushed off due to holidays or sick days," said Masterson. "To avoid this, make sure you have the work hours of all of your employees at least three days in advance. If you notice a paycheck will be late, let the employee(s) know as soon as possible."

Miscommunications

Mistakes are inevitable, and they're bound to happen from time to time. However, as an HR rep dealing with payroll, your mistakes are more public and need to be addressed.

You also need to discuss any policy changes or areas of confusion to guarantee you're on the same page.

"HR managers need to ensure that they maintain an ongoing and open dialogue regarding any factors affecting their employees' paychecks," said Kerner. "For example, tax rules frequently change, and HR managers need to ensure that they have a solid grasp of these changes. They need to make the time to educate employees on issues such as tax withholdings, which is a difficult concept to grasp, especially for employees that have moved to the United States from abroad and are unfamiliar with the tax code."

Misclassified employees

One of the most common mistakes companies make is not realizing that not everyone who works for the organization is considered an employee.

If your company hires freelancers, contractors or temporary employees, they are not classified as employees when it comes to payroll. The distinction between workers affects eligibility for benefits as well as whether employment and federal income taxes are withheld and whether you need to use a 1099 or a W-2 when reporting to the IRS. Misclassifying employees may result in a variety of consequences, including fines. It's essential to make sure you understand how those you hire will work within the organization.

Late payroll

When it comes to paying those who work for you, it is a task that you cannot push aside. Unfortunately, things happen, for instance, if you have outstanding invoices, it prevents you from being paid, which ultimately may affect your ability to pay your workers.

If there is an interruption in the scheduled payroll, it's essential that you make sure workers are aware of it as soon as possible. This will allow them to plan accordingly if need be, but you should never assume that employees are going to be OK with a late paycheck.

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