Common Payroll Discrepancies and How to Fix Them

11 payroll discrepancies to watch out for

Here are some common mistakes companies make when running payroll, along with solutions for each.

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 development coordinator 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.”

Solution: Collect critical employee data during recruiting and onboarding — a task made easier with HR software. Consider self-service options that employees can update as needed to avoid delays or inadvertent errors.

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, such as 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.

Solution: Use payroll software to automate processes and generate critical payroll reports. These reports should be available within your payroll solution to access whenever you need them, though it’s always a good idea to have backups.

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 but 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. 

Solution: Leverage your HR software to track employee absences automatically. HR solutions with self-service options allow employees to take charge of their time off, requesting as needed and viewing their calendars at a glance.

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.

Solution: Check federal and state government pages to review laws and regulations regarding employee payroll deductions. The best payroll solutions receive frequent updates based on the most current legal information and requirements, so you’re less likely to face deduction errors.

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 percent 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. 

Solution: Manual calculation of employee hours and wages, particularly when it comes to overtime, is more likely to result in errors. Automate the math by using payroll software, which can readily calculate overtime rates and wages.

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. While you may be able to transfer some of the data manually, it also introduces human error and data integrity concerns.

Solution: When researching prospective payroll solutions, look into software that performs multiple tasks or is listed as compatible with your existing systems. Seek out payroll software that sees frequent updates to ensure you aren’t locked into a system that will become outdated.

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. 

Solution: Review the laws surrounding each type of employee and classification criteria, including W-2 employees versus independent contractors and exempt vs. nonexempt employees. Should you find an employee is classified incorrectly, rectify the information as soon as you can in your HR system.

8. Neglecting taxes

Employers who misclassify their employees or neglect to pay payroll taxes on time or in full could face major consequences, such as 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. 

Solution: Double-check and triple-check tax requirements on federal, state and local government sites and ensure you file all documents and make necessary tax payments on time. Leverage payroll software to automate calculations whenever possible to limit human error.

9. Miscalculating pay

Factors such as overtime, paid time off, commissions, bonuses and rate changes can be challenging to track. If you 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.”

Solution: In addition to a multiperson approval process, automating pay calculations will also cut down on potential math mistakes. Payroll software can do this automation as well as conduct checks before running payroll to ensure everything is accurate.

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.

Solution: Stay up to date with payroll deadlines and any government legislation that may impact it. The best payroll software solutions will alert you to due dates and when pay will be distributed. It can also automate many aspects of the payroll process to avoid delays and errors.

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 comply. 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 into the Department of Labor laws that impact the state or states your business operates in.”

Solution: Ongoing communication between payroll and HR is key to ensure all parties are aware of payroll rules and regulations. Additionally, look into payroll software that can run automatic calculations and compliance audits, making the process easier for your HR team.

What is payroll correction?

Payroll correction is when adjustments to an employee’s pay are necessary. This can happen for various 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.

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. 

Additionally, having a robust payroll management system can help limit the number of payroll corrections you need to make. Many software solutions will alert you to potential discrepancies, allowing you to correct errors before you run payroll. Payroll systems can also help you stay in compliance with frequently changing federal, state and local tax regulations — an especially helpful tool if your company has employees in different geographic locations.

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. Then, it 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 be delivered automatically, whether by check or direct deposit. These systems can also remember important tax deadlines for you. 

Increases security

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.

Source interviews were conducted for a previous version of this article.