Payroll is an important process in every business, but it can be complex. Like any aspect of business, payroll is prone to errors. The best way to prevent those errors is to identify them before they happen. Here are some common payroll discrepancies, and how HR software can help you avoid and fix them.
Importance of payroll management
An organized payroll system can streamline your company's finances and eliminate human error. A payroll reporting system keeps you in good standing with your employees, as they know they'll be paid on a routine schedule. It can also keep you up to speed with government regulations and provide a simplified look at your company's finances. You can use this information to plan for your business's financial future.
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11 payroll discrepancies to watch out for
1. Incorrectly entering new employees in your HR system
The most important step you can take to prevent payroll discrepancies (and many other issues) is making sure new employees are inputted correctly into your HR system.
"Ensuring your new hires are correctly entered into your HR software will save you a lot of headaches down the road," said Sundee Peterson, training and curriculum development manager at Strategic Resources Inc. "This includes [ensuring] the proper accounting codes, labor categories, exempt status, and rate of pay are all accurate and kept up to date."
2. Misplacing payroll documents
Keeping track of all your employees' payroll records and pay stubs can be challenging, especially as your company grows and hires more employees. With so many documents – like payroll reports, expense reports and receipts – it's easy to lose track of one or to introduce miscalculations. An organized payroll system prevents documents from being misplaced and creating employee pay mistakes.
3. Inaccurately calculating employee absences
Accounting departments need to track employees' vacation and sick days. Not only is this information important for the company's records, it's also needed for government regulations. Businesses legally must offer their employees a certain amount of paid sick leave based on the hours they've worked. Tracking multiple employees can become complicated and lead to frustration for the employer – especially when there are different types of absences like paid time off, sick leave and sabbaticals.
4. Making errors in payroll deductions
Employee payroll deductions are wages an employer withholds from employees' total earnings to pay for taxes and benefits. These can include income tax, Social Security tax, 401(k) contributions and health insurance. Managing these deductions can become difficult, since many federal and state laws apply to such deductions. Employees also have some say in how much is withdrawn from their pay, adding to potential complications.
5. Violating overtime rules
Overtime is when any full-time employee works more than the normal 40 hours in a workweek. Federal and state laws require employers to pay overtime for these workers. The rate you must pay them depends on the state or city where your company resides. Typically, overtime is an additional 50% of the employee's hourly wage, also known as "time-and-a-half." As the overtime increases, so does the rate an employee legally needs to be paid.
6. Using incompatible payroll software and programs
Not all payroll software and programs are compatible with one another. As systems become outdated and new ones emerge, they might not work together or transfer data seamlessly. To avoid this issue, look into software that performs multiple tasks when you're researching your prospective payroll systems.
7. Misclassifying employees
Many small businesses use different types of employees, including full-time, part-time and temporary workers, as well as freelance contractors. Companies must ensure that they properly classify each type of employee for tax purposes. A mistake could mean underpaying on taxes, which will cause issues with the IRS and result in costly fines. [Read related article: How Should Your Employee Be Classified? 1099 vs. W-2]
8. Neglecting taxes
Employers who misclassify their employees or neglect to pay payroll taxes on time or in full could face major consequences, like hefty fines, a shutdown of their business, or other troubling legal issues. The IRS is aggressive in pursuing missed payroll taxes, so you need to check diligently that you are paying the proper amount.
9. Miscalculating pay
Factors such as overtime, paid time off, commissions, bonuses and rate changes can be challenging to track. If you do miscalculate pay for one of your employees, you must offer that employee retro pay on their next paycheck to compensate for the lost wages. If miscalculations become a common occurrence, the employee may form a negative opinion of your company.
"To prevent miscalculated pay, you want to make sure your payroll process goes through a rigorous approval process that involves several individuals," Peterson said. "This process may seem cumbersome, but it ensures everything is entered correctly before checks are processed."
10. Missing payroll deadlines
All companies need to adhere to strict schedules for accounting. If you miss a payroll deadline, it can result in an employee not getting paid on time. This mishap could cause a complete loss of wages, depending on expense policies. As with payroll tax deadlines, you need to be hypervigilant about meeting these due dates.
11. Failing to comply with payroll rules and regulations
Every state has different rules and regulations for employers, and they're always changing. Your business needs to stay up to date on any revisions to ensure you're in compliance. Failure to do so could lead to negative government intervention.
"It's important that your payroll department works closely with HR to ensure all state laws and regulations are being followed," Peterson said. "HR professionals are keyed in to the Department of Labor laws that impact the state or states your business operates in."
What is payroll correction?
Payroll correction is when adjustments to an employee's pay are necessary. This can happen for a variety of reasons, such as the employee or employer not accounting for time off, not submitting overtime, or not adding a commission to the last paycheck of a quarter. When these errors occur, they must be corrected immediately so the missed wages can be added to the employee's next paycheck.
How HR software can help avoid payroll discrepancies
One of the best ways to prevent common payroll discrepancies is to use payroll and HR software. Here are some ways HR software can help you avoid errors:
Prevents and identifies payroll mistakes
Once all the relevant information is in the system, the software does all of the major calculations for you. This prevents common blunders like miscalculating information or forgetting to make adjustments. In the event of any errors, the payroll software will alert managers to the discrepancy.
Ensures compliance with rules and regulations
Since it is connected to the internet, HR software can ensure your business's ongoing compliance with government rules and regulations. When new changes are made, the software updates automatically to reflect them. It then informs its users of new changes and makes the necessary adjustments going forward.
Streamlines payroll processes
HR software puts your company's payroll through a regular, organized system. Payroll will automatically be delivered, whether by check or direct deposit. These systems can also remember important tax deadlines for you.
HR software keeps all of your employees' financial information safe. Because the software uses security measures like two-factor authentication, data encryption, and security certifications, payroll data is more secure with one of these systems than with a manual process.