Top 3 Payroll Issues That Harm Your Bottom Line

Employees depend on your payroll system to be concise and on time every pay cycle, but avoiding issues is not always easy. Business owners—especially of small and mid-sized companies—often have too much on their plate to double back and check their work or fix mistakes. Precision is not always possible without a little help.

Even one-time errors significantly lower an employee’s chances for remaining with a company, especially after trust has been compromised. Costly errors occur when a company makes payroll tax mistakes, logs hours incorrectly or misclassifies employees in their system. Outdated, manual timekeeping adds a layer of human error when tracking hours. All of these costly issues compound over time, eventually becoming detrimental to your bottom line.

So how can you avoid the most common payroll errors? Get ahead of the issues before they begin and integrate useful tools for simplifying and shortening your process. We’ll explore the top three payroll errors that cost companies precious time and money.

1. Manual Timekeeping Errors

When a timekeeping system seems to work, most companies don’t see the reason to make changes. This is especially true if the payroll process has been set in stone for over a decade or was handed down by past managers.

Many small businesses depend on manual timekeeping, asking their employees to handwrite their hours, breaks and sick days on their own. Managers then transfer this information by hand into a payroll system to be processed.

Where’s the issue with manual timekeeping? With each step, the chance of human error increases. Even the most honest employees may forget their exact clock-in or clock-out time when they’re in a rush. An extra 15 minutes here and there adds up to hours of paid time off within just a few weeks.

Manual timekeeping also leaves room for buddy punching – the practice of coworkers clocking in and out for their colleague before or after they’ve arrived or left for the day. This vague and inconsistent system creates a breach of trust between management and their direct reports, leading to more retention issues in the future.

The problem is even more challenging when the manager makes an error transferring information from the timesheet to payroll. One false number could lead to a delay in payment – something that could be a deal-breaker for many employees. Without the unfailing trust that they will be paid correctly and on time, workers are far less likely to remain with a company in the long term.

2. Tax Issues

Payroll tax compliance should always be a top priority for businesses. If your bottom line is tight at the end of the year, never let tax payments drop to the bottom of your list. The use of payroll software can help you prepare for tax season while keeping up with all necessary paperwork and estimated payments throughout the year. Complicated tax reporting confuses a lot of small and mid-sized businesses. Investing in software with live tax support can save money and hassle in the long run.

Ineffective timekeeping directly affects your ability to manage tax compliance. Consider switching to a comprehensive program that organizes and communicates all the necessary details to your payroll company to avoid any complications.

3. Employee Misclassification

Onboarding a new employee inundates an HR department with information, especially if tax, benefits and information forms are completed by hand. Misclassifying an employee as exempt or non-exempt causes a range of issues and is a very common area of confusion. Each piece of information during this process can lead to payroll errors, tax complications, or labor law issues.

Errors can also affect minimum wage and overtime laws from the Federal Labor Standards Act (FLSA). If a full-time employee is wrongly listed as non-exempt and works beyond 40 hours a week, the government will still assume they require overtime pay.

Paperwork errors can also affect federal tax compliance. For example, misclassification may wrongly exclude employees from paying or receiving benefits like worker’s comp, disability or unemployment.

It is also important to avoid wrongly listing your employee as an independent contractor if they don’t meet state and federal guidelines. Misclassification can lead to hefty penalties from the Department of Labor and state agencies.

To determine whether your employee is an exempt, non-exempt or independent contractor, consider how much control you have over the employee’s schedule and nature of work. Financial relationship—whether the employee has a say in setting their rate—and the permanency of their employment also comes into play.

Catching Errors Before They Compound

Automated payroll software can be the key to avoiding inconsistencies in employee paperwork. Horizon Payroll Solutions allows new employees to fill out information online at their own pace. The program also stores all information in a cloud-based system, ensuring nothing is ever lost of mistranslated from a manual system. Access data 24/7 without waiting for data to sync and run customized reporting to check in on employee data.

Most importantly, an automated system alerts you of details you may have missed. Always stay on top of important tax alert, dates and issues that may arise in your payroll data. An automated system provides peace of mind in a complex process, helping you avoid all the common payroll errors that can impact your business.