5 Payroll Errors That Could Be Costing Your Company Money

Avoid These 5 Payroll Errors That Could End Up Costing Your Company Significantly

No matter how big or small a company is, every business suffers the costs that come from payroll errors. A study from Kronos found that 66 percent of payroll professionals and 51 percent of HR practitioners claimed that their organization occasionally cuts corners in payroll that could put the company in jeopardy for compliance.

To help your company avoid making costly mistakes made in the payroll process and to stay in compliance with state and federal regulations, Employer Support Services has provided five common payroll errors companies often make.


  1. Employee MisclassificationCompany boss having issues doing payroll.

For payroll and tax purposes, companies must classify workers as either employees or independent contractors. Distinguishing an employee from a contractor can be complex, and companies may see it as a way to save money on labor costs. The misclassification of employees, however, can come with serious consequences on both a state and federal level.

Misclassifying employees as independent contracts could also result in a federal tax evasion offense. Even if it was human error, if the IRS believes that you intentionally misclassified an employee as a contractor, your company could receive up to a $500,000 fine as well as a criminal conviction.

Further, if employees are classified as independent contractors and do not receive the benefits and coverage they should receive, your company could face high turnover or lawsuits. To avoid the consequences of employee misclassification, always double-check to ensure that your workers are correctly classified.


  1. Not Including Incentives When Calculating Employee Income

Incentives are a great way to motivate employees to increase productivity levels. However, prizes, bonuses, awards, and gifts that are given through a predetermined goal set by the employer is considered a non-discretionary bonus. Non-discretionary bonus incentives should still be calculated into an employee’s income along with the taxable wages for federal income documents. You must also include the amount for any overtime worked during the bonus period.

If an employer incorrectly writes off all incentives as discretionary bonuses to avoid the headache of recalculating overtime and taxes, the FLSA allows employees to file lawsuits against the company, which can result in back payments and liquidated damages on top of court costs and attorney fees.

There are a few exceptions. According to the Department of Labor, referral bonuses from recruiting new employees do not have to be included in an employee’s regular rate of pay if all three of the following conditions are met:

  1. Participation is strictly voluntary
  2. Recruitment efforts do not involve significant time
  3. The activity is limited to after-hours solicitation done only among friends, relatives, neighbors, and acquaintances as part of the employees’ social affairs

For more information about complying with discretionary incentives, review 29 C.F.R. S778.211 in the FLSA regulations.


  1. Using Paper TimesheetsWoman discussing payroll with company human resources manager.

Employees filling out a paper timesheet to give to the payroll department to reenter into the system is not only time-consuming, but it also increases the risk of human error. Under the FLSA, employers are required to retain payroll records for non-exempt employees for a minimum of three years. Time cards and sheets risk getting lost in the paper shuffle or accidentally thrown away, which can cost your company significantly in the event of an audit.

Additionally, “buddy punching” and time theft affects 75 percent of businesses nationwide and can cost a company up to seven percent of its gross annual payroll. With paper timesheets, a company is more likely to experience time theft as there is less oversight.

To avoid this payroll error and have better control of attendance, labor costs, and time conversions, ESS provides an electronic time and attendance tracker that seamlessly integrates time clocks, employee self-service solutions, payroll, and HR applications into one simple solution.


  1. Late Paychecks or Incorrect Wages

With 87 million Americans living paycheck to paycheck, miscalculating overtime wages in a single payroll period can significantly affect an employee’s engagement and trust. Forty-nine percent of workers even claim that they start looking for new jobs after experiencing problems with their paycheck.

To minimize the costs in labor, preventing employee turnover is key. Although some turnover is natural for every company, maintaining a stable workforce with a reliable paycheck is a core component that many employers underestimate.

Always make sure that banking holidays and other possible interruptions that may affect the distribution of employees’  paychecks are considered ahead of time. Be sure also to verify that employee information and time and wages are correct for every pay period so that employees receive the correct amount every time.


  1. Underestimating the Human Error Rate

The biggest payroll errors and mistakes in accounting come from human error. The American Payroll Association estimates the rate of human error in time card preparation alone totals between one percent to eight percent. Calculation errors, typos, or misplacing the decimal are all minor errors that can cost you more time to correct and correlate with the payroll errors mentioned earlier.

Companies with an automated payroll system with time and attendance integration were 44 percent more likely to have a payroll error rate at two percent or less. Although many employers trust their payroll managers to do the job correctly, providing your accountant or HR professionals with an automated system can save them time and can make a significant difference in the error rate.


Start Saving Money by Avoiding Payroll Errors with Employer Support Services

From compliance issues to simple human errors, payroll mistakes could cost your company both employee morale and money. ESS offers companies of all sizes a comprehensive online payroll management software that can be tailored to your business’s needs. From paychecks to benefits administration processing, our payroll system allows you to conduct payroll in less time with fewer mistakes while remaining in compliance.

Save money with error-free payroll services from ESS and contact a representative today.

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