Payroll is a tedious task, but one which has to be done right. A simple mistake can lead to large fines, lawsuits, and a violation of the bond of trust between employer and employee. Incorrect payroll can damage your company culture, increase turnover, and lower morale.
Here are the seven most common payroll mistakes that can cause big problems for you and your company:
Most states have regulations about how often employees must be paid. Missing a deadline and causing employees to receive their check late is thus a violation of state law that can lay you open to lawsuits and fines.
Furthermore, your employees count on receiving their pay on time. Late pay can cause them to not have enough money to pay vital bills or their rent, resulting in significant hardship that then reflects back on you. Paying on time and in full is your most basic duty as an employer.
You should always follow any kind of wage garnishment order. In the majority of states not doing so can make you liable for all of the employee's outstanding debt. Courts will hold employers responsible for large amounts of money for mistakes as simple as missing an answer deadline. Unfortunately, garnishments (of which child support and student loans are the most common) are extremely complicated to deal with. Tax levies are another thing which you might have to deal with.
You can't fire an employee unless they have more than one garnishment. You can encourage your employee to take steps to get rid of the garnishment, which a financial wellness program or Employee Assistance Program (EAP) can help with.
One of the most common mistakes is to misclassify an employee as exempt when they are non-exempt. Every so often, the rules change, which can cause an employee to change to non-exempt.
The FLSA sets these rules, and it's very easy to make mistakes that put you in violation. That results in the need to pay a lot of money. You need to make sure HR is familiar and up-to-date with the requirements.
The IRS sets very strict rules on when you need to deposit payroll taxes and file the return. If you are late or fail to file the right forms, you can end up paying a penalty, which can be as much as 15% of the amount you are required to pay. This is a complicated procedure with multiple due dates. You might also face a trust fund recovery penalty if the IRS judges that you have willfully failed to collect, account for, or pay the tax.
Non-exempt employees are generally owed overtime at time and a half, or 1.5 times their regular hourly rate of pay. The most common way to mess this up is to enter the incorrect rate of pay or fail to update the rate of pay.
As with misclassifying an employee, this can make you liable for back pay (and possibly damages) to make up the difference.
Not correctly tracking vacation and sick time can lead to an employee having a negative paid time off balance and you paying for sick time that the employee has not earned. It can also lead to managers granting vacation time when there's a crunch coming up because they weren't paying attention.
Finally, if state law or your own policies require a lump sum payout for unused time when an employee leaves, it's vital to get this amount right to avoid a complaint or even a lawsuit. It's even more vital if the employee is leaving in a less amicable way and already primed to complain.
Finally, it's easy to incorrectly track benefit deductions. This means that you enrolled an employee in the wrong selection (single when they requested family or vice versa), forgot to deduct one or more months of premium share, or similar. Many plans have a procedure for dealing with this, but if they don't you will have to consult with a lawyer to establish whether, and how much, extra money you can take from your employee's pay. Talking to the employee about the situation can also help.
All of these mistakes can lead to conflict between you and your employees and to large financial penalties that can threaten the health of your business. Even a small error, such as a typo when transferring base pay from one spreadsheet to another, can result in large problems later. Outsourcing your payroll is one way to reduce errors and help you stay in compliance with the law.