One thing that unites all employees in a workplace is the joy of reaching payday. In reality, payday can be both a stressful and chaotic time for both employees and their employers.
7 Common Employee Pay Mistakes and How to Avoid Them
Without an effective digital payroll system, making critical employee pay mistakes becomes unfortunately very commonplace. Companies usually have a thin margin or error in these matters because making these mistakes can cost them both money and time.
Also, employee morale can take a turn for the worst when they realize that their payment is late or the amount is inaccurate.
To avoid the catastrophe of a payroll dilemma, here are seven common payroll mistakes and ways you can prevent them.
1. Misclassification of Employees
A prevalent payroll issue to avoid is the misclassification of employees. Falling into this trap could lead to underpaying or overpaying employees.
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In fact, one of the costliest errors companies make is making incorrect judgment about whether or not particular employees are exempt from receiving overtime pay.
The Fair Labor Standards Act (FLSA) mandates that anyone working more than 40 hours every week must receive overtime pay. That is, unless if they are declared exempt.
When you declare an employee exempt from overtime pay, you practically open up the door for governmental fines due to FLSA violations.
In addition, you could also cause an employee to miss out on this valuable benefit. For example, a person may be outraged to find out that they’re working for more than 40 hours a week, only to be exempt from overtime pay.
Another similar error happens when you classify an employee as an independent contractor. Making this error can result in substantial consequences that will cause your accounting teams to sift through hundreds of records and send retroactive payments to these employees.
In fact, the US Wage and Hour Division of the Department of Labor reported that they received more than $300 million in back pay for employees misclassified as independent contractors.
Having this issue occur in your workplace can diminish employee trust and cost your organization millions of dollars in the long run.
2. Inaccurate Payments
An inaccurate paycheck can irritate employees for obvious reasons. It also wastes company time since your accounting team will have to loop back and investigate this matter in a previous pay cycle.
On average, it takes anywhere from 2-10 days to resolve an inaccurate payment issue. Within this time, employees can have difficulty paying their bills and take out this frustration on your business.
These miscalculations can happen to anyone, whether an employee is paid hourly or a salary. Common miscalculations happen when:
- Companies overpay or underpay individuals.
- Accounting teams issue inaccurate retroactive payments.
- Making erroneous benefits or payroll deductions.
- Paying employees who are disabled or on leave
3. Not Properly Tracking Employee Hours
Failing to properly log overtime payments can cause tax issues for many years. This issue is also stressful for employees who didn’t receive the amount they’re owed or have to pay back the company if they were compensated too much.
The problem with paying overtime is much larger than compensating employees 150% times their original hourly pay rate. These issues can occur when any of the following scenarios take place:
- Employees are still working during their break.
- Employees frequently travel between different company workplaces.
- Employees are required by the company to attend extracurricular activities, such as seminars, training events, and teambuilding exercises.
4. Failing to Report all Taxable Income
By law, all employee income must be taxed by state and federal agencies. This includes much more than salary, bonuses, overtime, and commissions.
While reporting these traditional items of employee income, employers are also required to report the following forms of taxable income:
- Personal use of company property, such as a vehicle.
- Travel awards, gift cards, and other employee rewards.
- Stock options and company equity rewards.
Even by providing a basic gift to an employee, the IRS will still require your business to report this type of income. When you ignore this duty, you’ll receive stringent fines from the IRS.
5. Unorganized Payroll Records
Having an unorganized method for organizing vital payroll records can lead to disastrous consequences down the line. Relying on manual filing techniques and Excel spreadsheets can cause your accounting teams to spend countless days and weeks uncovering critical issues.
Also, having a manual payment processing system can cause problems when the main contributor is away or leaves the company. By investing in a payment gateway or processor, it becomes much easier to automate this process.
Thus, your payroll records can become more organized for on-time, accurate payments and available for a potential audit from the IRS.
6. Missing Deadlines
It’s no secret that employees expect their employers to make on-time, accurate payments. Whenever you miss these important deadlines, you’re putting your employee morale in grave danger.
If you miss important tax deadlines as well, you could receive stiff penalties and fines from the IRS.
7. Inaccurate W-2s
A new employee will typically receive a W-2 form during the onboarding process. The W2-form clearly outlines:
- Health spending accounts
- Employee benefits
- Payroll withholdings
- Other taxable or gross income
Employees use W-2s to file their taxes. One small error can lead to a cascade of penalties and headaches on behalf of your company and employees.
How to Avoid Employee Pay Mistakes
As you can see, making even the smallest payroll mistake can have significant consequences. To avoid these consequences, here are some effective tips to follow:
- Create clear payroll policies and procedures.
- Evaluate your current procedures for possible errors and areas of improvement.
- Automate your payroll processes to avoid manual errors.
- Produce a payroll calendar for important deadlines.
- Understand both the current and latest laws and government regulations.
Keep Your Payroll Processes in Check
Payroll is an important process that ensures that every company employee is paid both on-time and accurately. When this process is disturbed by errors, you could risk a company-wide disaster.
Taking heed to these common employee pay mistakes can help you avoid them, save time and money, and keep your employees satisfied for the time being.
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