Payroll Mistakes: 10 Errors You Need to Fix Now

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Payroll is a central task of the human resources department that companies must carry out correctly, as frequent mistakes can quickly lead to significant costs.

A smooth payroll process is like good restaurant service: when everything runs smoothly, you hardly notice it. But when it goes poorly, it is everywhere. This makes payroll one of the least noticed yet at the same time most important functions in any company. Correctly executed payroll contributes to employee satisfaction and helps to avoid legal consequences.

However, if problems arise in payroll, they can affect the entire company. Corrections can be costly, and mistakes come at a price – from dissatisfied employees to legal repercussions.

This guide shows you common payroll mistakes and how to avoid them in the first place. With the right knowledge, good planning, and the right tools, most mistakes can be easily prevented. IceHrm helps you ensure your employees are paid correctly with its payroll solutions.

The 10 Most Common Payroll Mistakes

In a process as complex as payroll, there are many opportunities for companies to make mistakes. Here are some of the most common errors to watch out for in your business.

1. Misclassifying Employees

The U.S. Fair Labor Standards Act (FLSA) provides most employees with benefits and protections, such as overtime pay and minimum wage. Independent contractors, however, do not enjoy the same protections. Similarly, employees with and without overtime pay have different rights. Some companies make the mistake of incorrectly classifying their workers as independent contractors or as employees exempt from overtime pay.

This error in payroll can not only affect important social benefits and wage payments, but it can also cause the state to lose tax revenue. If left unchecked, the resulting underpayment or overpayment can become a costly payroll mistake. Over the past 25 years, large US companies – including FedEx and Microsoft – have been sued for misclassifying employees and had to pay millions in compensation.

2. Incorrect wage calculation

When it comes to overtime, commissions, deductions, paid leave, and much more, payroll accountants have to take numerous factors into account when processing payroll. Overtime pay is generally set at 1.5 times the regular hourly wage for any hours worked over 40 hours per week. Overtime regulations can vary depending on the federal state, but the rate most favorable to the employee must always be applied.

Insufficient time tracking systems can also lead to errors in payroll processing. If your company does not have a reliable system for recording working hours and paid leave, the risk of overpayment or underpayment increases significantly.

3. Missed Payroll Deadlines

Timing is crucial when it comes to payroll. However, given the many steps involved in the payroll process, it’s easy to miss an important deadline. This leads to payroll errors that will need to be corrected later. Your employees rely on your company to pay salaries regularly and on time. Failing to adhere to a reliable payment schedule can undermine your employees' trust in your company. In addition, many federal states have specific requirements regarding the frequency of salary payments.

4. Missed Payroll Tax Deadlines

Deadlines are also crucial for payroll taxes. Missing a tax deadline is an error in payroll accounting that can cost your company significantly in the form of late fees, penalties, or even attorney fees. Knowing your schedule – both internally for payroll and externally for taxes – is essential for smooth payroll processing.

5. Failure to Send Tax Forms

The turn of the year is a hectic time for payroll accountants. After a year of payroll accounting, companies must send all necessary tax forms to their employees. Employees need wage and tax statements (W-2), while self-employed individuals who earned $600 or more need forms according to Form 1099.

If the correct forms are not sent to the right people on time, it can be frustrating not only for the employees but also cause problems for your company. Tax rates can change and must always be up to date in your payroll. Make sure that this information is accurate to avoid additional tax payments or corrections in payroll accounting.

6. Incomplete Payroll Accounting

Another important aspect of payroll accounting is the proper retention of payroll records. The FLSA (Fair Labor Standards Act) requires employers to keep payroll records for three years. These records include, among other things, hours worked, hourly rates, and pay dates.

Keeping this data not only protects your business during future audits but also makes payroll processing easier. Without complete and up-to-date records, you risk miscalculations, incorrect employee classifications, and other costly errors.

7. Incorrect Time Tracking  

Time tracking is indeed an important part of human resources, but errors in time tracking lead to another common payroll mistake: paying your employees incorrectly. It is also important that overtime is recorded accurately and compensated at the correct hourly rate.  

Time tracking tools support HR departments in management and help you keep payroll under control. They allow the automation of time tracking and attendance monitoring, so you can be sure to pay your employees correctly.

8. Incorrect Employee Data

In payroll processing, HR departments must ensure that all employee data is accurate, especially:

  • Full name
  • Date of birth
  • Current address
  • Start of employment
  • Tax identification number
  • Payroll data

Incorrect information can lead to costly issues with the tax authorities, as this data is essential for salary payments. The right payroll software stores all employee data centrally, allowing you to always keep track. This helps HR departments comply with legal requirements and ensures hassle-free employee data management.

9. Overlooking Holidays

HR departments need to be aware of nationwide holidays, as they can impact payroll. On holidays, payroll may need to be processed earlier than expected to avoid delays and errors. This can also affect your employees' salaries.
Keep an eye on when your bank is closed for holidays so you can adjust your schedules accordingly. For example, if a holiday falls on a Sunday, banks may be closed on the following Monday. In such cases, payroll may not be processed until Tuesday.

Nationwide holidays you should be aware of include:

  • New Year's Day
  • Martin Luther King Jr. Day
  • Washington's Birthday
  • Memorial Day
  • Juneteenth (National Independence Day)
  • Independence Day
  • Labor Day
  • Columbus Day
  • Veterans Day
  • Thanksgiving
  • Christmas
  • Presidents' Day

10. Ignoring state laws  

Each state has its own payroll laws, and these can change. Your HR department must be aware of the differences between states to ensure compliance with local regulations. For example, there may be different laws regarding minimum wage, overtime pay, or breaks and working hours.  

Being unaware of the differing state regulations can be the difference between accurate payroll and costly mistakes. Avoid this common mistake and stay informed about current wage laws in the USA.

How to Avoid Common Payroll Mistakes

To avoid the errors mentioned above, different strategies are required. We have compiled our key tips for you. By integrating these into your processes, you can identify the most common payroll mistakes early and thereby speed up, simplify, and make the process more accurate.

Invest in the right payroll services.

The best way to avoid payroll errors and the associated business processes is to invest in compatible payroll services and a Human Resource Information System (HRIS). A suitable HRIS manages and updates important employee data such as wages, working hours, account numbers, and deductions. These changes are then automatically transmitted to your payroll system, eliminating double data entry.

At the same time, the right payroll software should be synced with your HR system and automate the most time-consuming tasks. Payroll software makes it easy to generate reports, submit tax declarations, distribute pay slips, and much more.

Ensure Compliance with Payroll Regulations

Many errors in payroll accounting occur when payroll accountants are not sufficiently or correctly informed about the applicable regulations.

Laws and guidelines are constantly changing and can vary from state to state. Therefore, it is crucial that your payroll team stays up to date on current local regulations (especially if you have a national or international presence).

Some basic research and reviewing your assumptions can go a long way in avoiding common payroll mistakes. For example, make sure you can answer the following questions:

  • What is the difference between exempt and non-exempt employees?  
  • Is this employee correctly classified?  
  • Which government regulations apply to this employee?  
  • How do we ensure compliance with regulations when new rules are introduced?

Generate Reports Before Payroll

If you have access to payroll software, creating some key reports before running payroll can help identify and prevent common errors. We recommend generating the following reports to ensure that all amounts on your pay slips are correct:

  • Deduction Summary: Provides an overview of all deductions for each employee, so you can verify the amounts.
  • Payroll Register: Displays all payroll information in a clear format.
  • Cash Flow Requirements: Shows how much money your company needs to have available to pay wages and salaries, broken down by categories such as wages, taxes, deductions, etc.

Keep a checklist for payroll

With a proven checklist, you will always be on the right track. Payroll accountants have a lot to consider, even with appropriate software. With a checklist, you can go through each step in detail and review documents piece by piece to ensure accuracy.

It is also advisable to maintain lists of all new hires, salary changes, deduction changes, and other updates centrally and sorted by payroll period. This way, you can review each list for the respective period during payroll processing and ensure that all changes have been correctly implemented.

Common Payroll Mistakes – FAQs

With so many different aspects, payroll can be tricky. Here we answer the most frequently asked questions about the process and the most common mistakes.

What is a payroll adjustment?

Payroll adjustments are necessary when changes need to be made to the amounts paid to employees. Errors in payroll, such as forgetting vacation days, can result in money being added to or deducted from the original salary amount.

Sometimes your team has to search through historical data to correct errors. This takes time and effort that could have been avoided if the errors had been detected early or prevented from the start.

How long does a company have to correct an error in payroll?

The legal deadlines vary depending on the federal state, but in general: errors should be rectified immediately. Missing wage payments should be corrected as quickly as possible to avoid penalties. Labor laws require full payment for work performed, and most companies either adjust the missing amount in the next payroll or transfer it between payroll periods.

Who is responsible for errors in payroll?

Ultimately, the employer is responsible for errors in payroll. It is your responsibility to make corrections and resolve any issues. Some payroll mistakes violate the U.S. Fair Labor Standards Act (FLSA) and the U.S. Social Security Act (FICA).

Legal disputes and settlement agreements can also cost your company hundreds of thousands of dollars. Therefore, it is in your company's best interest to avoid payroll errors from the outset.

Optimize your payroll!

Knowing the most common payroll mistakes is an important first step in avoiding them and ensuring a smooth process. Even though a smooth payroll process may sometimes seem thankless, it has a positive impact on many other areas of your business, such as employee satisfaction and even company culture.

Payroll is a function that demands precision and timely compliance. The most frequent and costly mistakes—from employee misclassification and calculation errors to missed tax deadlines and neglecting state laws—stem primarily from a lack of integrated systems and up-to-date knowledge. By proactively investing in a robust HRIS and payroll solution like IceHrm, companies can automate time-consuming tasks and significantly mitigate these risks. IceHrm centralizes accurate employee data (addressing mistake #8), simplifies the calculation of overtime and deductions (addressing mistake #2), provides tools for accurate time tracking (addressing mistake #7), and ensures all data is securely recorded for compliance (addressing mistake #6). Ultimately, using IceHrm transforms payroll from a complex liability into a smooth, compliant process that supports employee satisfaction and protects the organization from expensive legal pitfalls.