How To Correct Payroll Errors

Mistakes in processing payroll are inevitable because payroll can be intricate, demanding precise calculations, numerous employment and tax regulations, and strict adherence to deadlines. 

For example, if you underpaid an employee, you can inform and correct it in the next payroll cycle.

Therefore, the key here is knowing how to correct them effectively. In this guide, Aniday walks you through critical payroll errors with suggested solutions and how to control them.

What are the most common payroll errors?

There are many common payroll errors, and here are some hand-picked mistakes by Aniday and ways to correct them effectively. 

Mistake 1: Incorrect Employee Information

One of the most common payroll mistakes is having incorrect employee information in the payroll database. For example, an employee's name can be misspelled, a tax number or contact details can be incorrect, or an address can be wrong, which may lead to legal complications.

Solution: Ensure frequent checks of the payroll system to prevent incorrect information. If an error is detected, correct it immediately. Also, having an annual "double-check" system or a centralized HR system to review and update employee information can save a lot of hassles.

Mistake 2: Misclassifying Employees

The Fair Labor Standards Act (FLSA) mentions specific benefits, such as overtime pay, minimum wage, and etc. However, these benefits do not apply to independent contractors.

Hence, there are both exempt and nonexempt employees who receive specific benefits and protections and are eligible for legal rights. When you misclassify such employees, they may lose or get additional benefits, resulting in an underpayment, overpayment, or payroll error.

Also, depending on country regulations, certain companies may be fined up to $5,200 to $100,000 for misclassification errors.

Solution: Regularly ensure that the employees are classified correctly. If classified incorrectly, make sure you pay back their benefits, employer taxes, and social contributions based on legal regulations.

Mistake 3: Missing Payroll Deadlines

When it comes to payroll, on-time payments are a key rule. Meeting deadlines helps attain customer satisfaction and trust, even though the payroll process is complex. 

Companies should also meet ideal tax deadlines, including those related to employee payments. Paying tax fees late may result in a late fee or even a penalty, including legal issues. Hence, both internal and external taxes should be managed effectively.

Solution: If you cannot meet a specific payroll deadline, inform the employees through a company-wide email, including the new pay date. If there are issues with the cut-off dates, consult a legal professional and sort out the situation based on your requirements.

Mistake 4: Miscalculating Pay

A payroll system has many specifications for employees to keep on track. For example, the system should be updated with deductions, overtime, commissions, and etc. Also, the pay would differ in each instance, like the overtime payments, based on each country's regulations.

What happens when the payroll system is not updated with these payments? It may result in miscalculated pay, which can be an overpayment or a costly mistake.

Solution: If an employee is underpaid, ensure the due benefits and amounts are paid back during the following payroll cycle. If overpayments are made, consider the employee's convenience and regulations, and the revised amount should be handled effectively.  

Mistake 5: Not Storing Complete Payroll Records

According to the FLSA, employers must store three years of pay records. Even though the records include plenty of data, they must be organized and stored effectively.

These data would be helpful for legal problems, audits, or even company-related payroll problems. An employer should never risk not storing these data.

Solution: Investing in a Payroll service provider who can organize and keep the updated payroll information would be effective. Also, you can have a timekeeping system to update the information frequently. Alternatively, storing it in the cloud would be a cost-effective option.

Mistake 6: Neglecting To Send Tax Forms

Employers should send the ideal tax forms on time at the beginning and end of the year. General employees require W-2 forms, while independent contractors who have earned more than $600 require 1099s forms.

Neglecting to send the correct forms at the right time will cause trouble for both the employer and the employee; also, the correct tax rates need to be updated to avoid tax-related mistakes.

Solution: Payroll professionals should set reminders and begin preparing to arrange the ideal tax forms and send them on time for employees. This would benefit both the employer and the employee.

Mistake 7: Inconsistent Payroll Policies

While handling payroll policies, the regulations should be applied consistently across all employees. Not doing so may raise complaints and confusion among employers and employees.

Solution: The company should review its payroll policy effectively and update everyone on the changes. Ideal sessions and training can be given for employees to help them understand if there are any clarifications or new policies.

What Are The Controls For Errors In Processing Payroll?

At Aniday, we’ve collected best practices you can implement to prevent any payroll errors, including: 

• Hire a payroll service provider: If your in-house team makes many mistakes, you can invest in hiring a payroll service or HRIS.
• Ensure payroll compliance: Ensure correct payroll compliance information is available so the payroll team can comply with the current rules and regulations.
• Process reports before payroll processing: Getting a summary of the payroll process reports, including deductions, cash requirements, wages, and taxes, may help you identify any payroll errors in advance.
• Consist of a payroll process checklist: A payroll process checklist helps organize the workflow and ensures that every step is carried out accordingly.
• Hire a global payroll provider. Global payroll providers help keep up-to-date information on local labor laws, compliance, currency conversions, withholding, social deductions, benefits, and more effectively!

Final Thoughts

In conclusion, correcting payroll errors is a complex process, but you can always use strategies to prevent them from happening.

If you need services, including Employer of Record (EOR) services, you can contact Aniday with your requirements. Reach out to us directly or through our headhunting today!

We hope this guide helped you to identify and correct payroll errors!