We all make mistakes. However, when it comes to employee payroll compliance, even small errors run the risk of legal consequences and cause damage to the relationship with your employees. From processing payroll, keeping up with the constant changes in state and federal tax and employment laws, to paying employees, and filing taxes there’s a lot of room for error. The good news is that with the right education, planning, and tools, these payroll errors can easily be avoided.
Here are the top payroll errors managers face on a daily basis, and how you can fix them.
Most Common Payroll Mistakes
Mistake 1: Misclassifying Employees
Companies are legally required to correctly classify employees. Independent contractors such as temporary employees or freelancers are very different from your full-time, salaried employees when it comes to payroll. It’s easy to mix these two up, but it ultimately leads to overpayment or underpayment of wages and can subject your company to significant fines and penalties. Knowing the difference is the first step. Independent contractors do not have to be paid minimum wage, are not subject to overtime wages, and do not have employment taxes withheld from their paychecks. Employees must be paid at least minimum wage, can earn overtime wages, and have employment taxes withheld from their checks. When an employee is misclassified as a contractor, you end up paying both the employee and employer’s share of taxes, plus penalties and interest. And, you may owe back wages to the employee if you paid less than the minimum wage.
Determine if your worker is an independent contractor or an employee by using the Department of Labor’s economic realities test or the IRS’s Employee vs. Contractor Designation test. If you know that you’ve already made this mistake, you can check to see if you qualify for the Voluntary Classification Settlement Program.
Mistake 2: Miscalculating Overtime Wages
Calculating overtime often poses to be difficult since the rate of pay can differ between employees. This goes back to the importance of classifying employees. Salaried employees don’t get overtime while nonexempt employees qualify for overtime pay when they work more than 40 hours a week. This becomes even more complicated between states, which have different laws for time and a half pay.
For these reasons, a comprehensive time and attendance system is a must. Even if you are meticulously monitoring your employee’s work time, having a payroll software on your side will help you avoid any legal disputes, as well as save you valuable time when tracking employees.
Mistake 3: Using the Wrong Tax Rates
Tax rates change more often than you’d think and it’s up to your company to stay on top of any and all tax changes in employee payroll. If you pay the wrong rate, you will need to make up the difference of what you owed, in addition to late fees, penalties, or adhere to applied interest rates. There are several payroll tax rates to know:
- Federal income tax
- Social Security tax
- Medicare tax
- Federal unemployment tax
- State income tax
- State unemployment tax (SUTA)
- Local income tax
Many times your state government will send out notices in the mail about when tax rates change, but ultimately it’s on you to stay up to date on this information. This is where a payroll software can be a lifesaver. Online payroll systems automatically stay updated with all tax rates—That’s one less thing for you to worry about.
Mistake 4: Missing Tax Forms
While we’re on the topic of taxes, it’s a common mistake for employees to forget to send out tax forms to their employees, or send out the wrong forms. In addition, you need to keep every year’s tax forms for your records. Suddenly, you’re not only dealing with a lifetime of employee previous tax forms, but you need to distribute the current forms on time. Most companies opt for HCM platform which not only acts as a well-organized database for your tax records but also offers self-service so that all the tax information that your employees need is available to them 24/7.
How to Avoid Payroll Errors
The best way to avoid payroll errors and improve your payroll management is by investing in the right tool. A payroll software solution will help streamline your organization’s payroll process, mitigate errors, and save you time and money in the long run. PayNW’s cloud-based Human Capital Management Platform can transform how your organization approached the payroll process. Our unified tool not only helps identify errors but prevents them as well. Our solution aims to help mid-size and growing organizations more efficiently and productively manage and engage their workforce.
PayNW is the premier provider of a unified cloud-based human capital management platform for mid-size to growing businesses. Our client services team is ready to assist you via email or by calling us at 866-729-6920.