By Edupliance | 28th September, 2016

Payroll calculation isn’t as tough as it used to be in older times. Today, with the myriad of payroll software available in the market, payroll calculation becomes a breeze, but miscalculations can always occur due to human error. What lazy and complacent payroll management professionals fail to understand is that one minor calculative error in payroll can bring the IRS knocking on your workplace’s door.

Chances are that your business has already encountered many payroll issues when it was too late to realize them. In this article, we have compiled the most common issues in payroll calculation that not only cost your workplace serious money, but also threaten the credibility of your business’s ethics as well.

Payroll and the IRS

The payroll of your business ultimately reaches the IRS for taxation and other benefit deductions. Blatant errors like inconsistency in the payroll process, under and over payments, incorrect tax withholding, improper documentation and software abuse are some areas where payroll professionals often fail to correct mistakes that turn into blunders.

Not only does this put you under the scanner of the IRS, but can also invite massive penalties in the form of arbitrary action and litigation. We are here to help you avoid this. The most frequent payroll errors are categorized below along with a solution on how to rectify them:

  1. Software Incompatibility: Many payroll processing programs are not suitable for your kind of business, but you still unknowingly used them. Some programs are used for employee profiling and record-keeping, some record pay and calculate benefits and some monitor employee performance. As they say, ‘too many cooks spoil the broth’, you need to fix this error of using multiple software when one is enough.

Solution: Find a program that integrates all the above functionalities into one suite. This will help to streamline payroll maintenance and calculation, and also cut down time wasted on tracking and entering data into multiple software. Plus, this is more cost effective as well!

2. Incorporating Updated Tax Declarations: Employers have to deduct taxes on behalf of the employees. However, some businesses manually enter these declarations tendered by employees into the computer software back-end. This leads to manual errors and can lead to excessive tax deduction which can make employees unknowingly lose money from their salaries.

Solution: Such deductions should be double-checked and cross referenced with the employee’s basic pay. Additionally, employees should periodically contact their payroll department to verify these details for fair tax deductions.

3. Tracking Employees and Updating Their Leave & Attendance Data:  Many companies now use biometric or RFID attendance monitors. Sometimes, due to technical faults or misuse, corrections are made by HR teams to these records, but fail to show up in payroll. This can lead to employees getting paid short for the month, even though their attendance speaks higher number of days in office.

Solution: Approvals by managers should be taken on regular basis to update these access based control systems. Moreover, records should be updated in the system on weekly basis so that final payroll calculation comes out correct and employees get paid what they deserve.

4. Multi-State Payroll Compliance: Many problems arise when a business is spread over multiple states and if their employees work in two or more states or countries at different times. Sometimes, keeping track of all the states and federal laws governing such employees can be difficult to track and their minimum wage requirements can be under or over-calculated.

Solution: If you have to use completely different [payroll systems to file taxes and calculate wages for employees in different locations, updating yourself about these systems and the latest tax and employment laws of these areas is a must. Also, your legal department should also be updated on laws about improper tax filings so that they can costly fines due to errors.

5. Misclassified Employees: Many times, temporary freelancers, independent contractors and contractual labors are misclassified as employees of the company. This can cause huge problems when it comes to calculating payroll and paying them since hired employees are always paid more than workers who are on contract.

Solution: Keep proper records for each kind of job an individual is performing since they are all entitled to different benefits and they also need different paperwork. Form W-2 is used for employees and Form 1099 is used for non-employees for reporting payroll to the IRS. Misclassifying either of them can cause massive fines from the IRS.

6. Calculating Overtime Payments: The FLSA (Fair Labor Standards Act) requires all companies to pay employees wages one and one-half higher than their regular rate of work hours worked over 40 within any single work week.  Sometimes, the correct rate of payment and differentiation with normal wages can be tough to track.

Solution: Update all employees interested in overtime about the federal law and monitor employee hours so that they not do overtime unless required by the company. Also, keep a track of the payroll processor to ensure that timings and pay rates are being recorded accurately.

These are some of the very common payroll mistakes out of the many errors that happen in payroll processing. By following these tips you can ensure that your payroll comes out error-free and accurate. Additionally, you can always outsource payroll calculation to a payroll processing company to reduce costs and ensure that things run fine. They will provide you with secure cloud backups and also protect you from security breaches or loss of information.

Ultimately, timely and detailed management of records, following the latest state and federal laws and keeping up with the latest compliance demands will not only help you avoid penalties and government investigations, but also help you turn payroll processing into a cost-effective solution that uses the business’s money in the most right way possible.