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Common Payroll Mistakes and Payroll Errors - How to Avoid Them

Common Payroll Mistakes and Payroll Errors - How to Avoid Them

We all make mistakes. However, when it comes to processing payroll even small errors run the risk of legal consequences and can cause damage to your relationship with your employees. The good news is that with the right education, planning, and tools, these payroll mistakes and errors can easily be avoided.  

The Biggest Payroll Mistakes 

Here are the most common payroll mistakes and errors that managers make. 

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. So it is very important to understand how to classify employees

It’s easy to make a mistake when classifying employees, and making an error will ultimately lead 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 vs. Employees

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 them less than the minimum wage.  

Miscalculating Overtime Wages

Calculating overtime often poses difficulty 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 payroll software on your side will help you avoid any legal disputes, as well as save you valuable time when tracking employees. 

In order to avoid improper overtime pay and calculations, it is also important to understand the current 2024 federal exempt salary thresholds.

Payroll Tax Errors  

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, and 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 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. 

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 an HCM platform that 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. 

Scams and Payroll Fraud

In a modern world full of technology things such as employee spoofing attempts are becoming more and more common. As such, some businesses do fall prey to such a scam. 

Finding a payroll solution that also protects against things such as payroll fraud and direct deposit scams is crucial to avoiding one of the biggest and most costly payroll mistakes you can make. 

Get Started With Accurate Payroll

The best way to avoid payroll mistakes and errors and improve your payroll processing and data management is by investing in the right tool. 

With every state having different rules and requirements around payroll, it's easy to get caught up in the differences and make a mistake. For instance, processing payroll in Washington State has a long list of requirements and rules.

A payroll software solution will help streamline your organization’s payroll process, mitigate errors, and save you time and money in the long run.

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’s cloud-based Human Capital Management Platform can transform how your organization approached the payroll process.

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