The payroll process is one of the most important functions of a business and when done correctly can avoid legal implications for the business. It can get complex and there are a few common areas where companies can make mistakes. Here are some of the most common payroll mistakes that tend to happen.
1. Misclassifying Employees
Businesses use different types of workers, they can be classified as permanent, part-time, temporary, freelance contractors, and vendors. It is important to classify your employees correctly especially for tax purposes. Most employees are provided with benefits and protections like overtime pay and minimum wage under The Fair Labour Standards Act (FLSA). However independent contractors cannot claim these benefits and the legal rights of exempt and nonexempt employees differ. Misclassification denies employees important benefits and wages and denies the government its tax revenues. Misclassifying the category of the employee can turn out to be a critical and costly payroll error as the business will have to pay owed taxes as well as fines and penalties.
2. Miscalculating Pay
People who manage payroll systems have to keep track of a whole lot of things while calculating pay. This includes overtime, commissions, deductions, PTO, wages and much more. Although the general rule for overtime wages is to calculate it at one and a half times the regular wage for time worked beyond forty hours in a workweek, it can differ from state to state. It is important for the company to comply with whichever law is more generous to the employee. Pay can also get miscalculated if time has been tracked incorrectly. Companies should invest in reliable ways to track employees’ hours worked, paid time off and overtime else the chances of making a mistake will be very high. These mistakes will not only be detrimental but will also need payroll correction later. Miscalculating pay will end up in unforeseen expenses in back wages, penalties and interest. Payroll corrections have to be made promptly and completed within the legal timeframe of your state to avoid penalties.
3. Missing Payroll Deadlines
Missing a payroll deadline is quite a common payroll mistake because of the many steps involved in the payroll process. Failing to meet deadlines can be demoralizing to employees and can damage their trust and opinion of the company. They count on you to get their wages on time and consistently. You need to consistently pay your employees at a fixed time whether it is weekly, biweekly, semimonthly or monthly. You also need to be aware of state payday requirements. Besides paying out your payroll on time you also need to keep track of your payroll taxes and their deadlines. If you miss a tax deadline you will incur a considerable amount in late fees, penalties, or even legal trouble. Keeping track of your payout timeline both internal and external is crucial to a smooth payroll process. Also bear in mind the time that it takes for payments to process.
4. Neglecting to Send Out Tax Forms
The end of the financial year can be a hectic time for the people involved in the payroll process. The business is responsible to send the necessary tax forms to its employees. Employees need to be given a W-2 form whereas independent contractors need to be given a 1099 form if they have earned over six hundred dollars. It is important to give employees the right forms at the right time. Failure to do so is not only inconvenient to your employees but will also result in trouble for your company. Ensure that you are upto date with the tax rates concerned with your payroll in order to avoid owing taxes, or paying penalties and fines.
5. Failing to Keep Complete Records
As an employer, you can never be too thorough with your payroll records. You are required by the FLSA to keep three years worth of payment records which include hours worked, payment rates, and payroll dates. Check your state requirement as some states require records that date even further back. Keeping complete records keeps your data safe and also keeps your business safe in case of future audits as well as helps you run a smooth payroll system.
Payroll mistakes can result from incorrect or incomplete information especially because laws and policies are always changing and vary from state to state. It is crucial for your team to remain up to date with changes that are happening and be aware of common mistakes that will disrupt the process.
Are you looking for a financial advisor who can help you prevent making payroll mistakes? We can help you manage your payrolls and help keep your business running smoothly. We also provide businesses with a complete fractional accounting team for the price of a full-time bookkeeper. Get in touch with us at Accounovation.com for a free consultation on how we can assist you with accounting services.