Payroll Errors That Cost You Money and How to Fix Them

Still using pen and paper for employee time record keeping? Relying on shift schedules for payroll calculations? Then your company is leaking money and you’re probably open to lawsuits and IRS penalties.

If it’s any consolation, you’re not alone. 33% of employers make payroll errors costing billions of dollars annually, according to the IRS. The American Payroll Association shows an error rate of between 1-8% of total payroll in companies that use traditional timecards, and roughly 40% of small businesses incur an average of $845 a year in IRS penalties as a result of mismanaged payroll processes.

“Errors are going to happen,” Bill Dunn, director of government relations for the American Payroll Association, said to CNBC Make It. “They are not common, but they do happen.”

Why do business owners let this happen? Because it’s easier to assume that payroll errors don’t happen (or ignore them when they do), than it is to change old habits.

too busy to fix payroll errors

Employees should pay attention to the following:

Don’t lose any of the money you’ve worked so hard for, instead make sure that you review your pay stub on a regular basis, and pay special attention to:

  • Look at the gross or net pay, do you see any changes?
  • Were your wages recorded correctly? (If you work hourly, were you paid for all the hours worked? If you are a salaried employees, was your salary recorded correctly for the pay period?)
  • What taxes were withheld (federal and state)?
  • Are your 401(k) contributions correct?
  • Are other benefits, like healthcare,  life insurance, disability or commuter, being withheld correctly?

If you spot mistakes then you can take this to human resources to quickly correct the mistake and to help future payroll errors from occurring again. It’s all about fixing payroll errors before it gets out of control.

costly payroll mistakes infographic

What Payroll Errors?!

As a small business owner, you do everything in your power to manage payroll efficiently and without mistakes. Well, maybe not EVERYTHING. After all, you have a business to run, and there’s only so much time you or your HR team (if there actually is one) can invest in checking and re-checking employee timesheets. However, some of the errors hiding in that pile of timesheets are costing you money already, and might cost more in the future.

Here are just a few of the issues plaguing businesses still depending on outdated timekeeping practices:

Payroll Document Mess (or “Who moved my timesheet?”)

One of the main disadvantages of paper over digital media is the challenge in keeping up-to-date backups. Paper timesheets and punchcards are fragile and perishable. It’s a liability! They can be swapped, altered manually with no record of the changes made, destroyed or simply misplaced.

Just imagine having to deal with a fire or a flood in your business, while at the same time freaking out about having no records of employee hours to calculate payrolls.

Overtime Wages are Miscalculated

As a small business owner, you have to calculate overtime wages correctly – overtime wages are completely different than regular wages. You will owe wages, penalties and interest if you don’t pay the correct overtime rate. Fixing payroll errors means taking a close look at the overtime wages.

According to the FLSA, you are required to pay employees 1.5 times their regular rate of pay, or time and a half, for time worked past 40 hours in a workweek. For example, if an employee is regularly paid $10 per hour, then you owe them $15 per hour for overtime worked. Note that most states and cities have different overtime wage laws so be sure to study if you are required to follow the more stringent rules.

Absence Kerfuffle (Working on Vacation)

Depending on how you calculate payroll and what sources of data you rely on (timeclocks, shift schedules, employee reporting), you might come across overlapping time clock entries and payable time accidentally misclassified.

At best, this sort of mix-up will demand time to figure out. At worst, you might end up paying a lot more than you need to.

For example, consider an employee on vacation suddenly having to work to take care of an urgent matter. Your records might then have an employee on paid leave clocking in work hours. Sorting this whole mess out can be a small headache when you have a team of a dozen. But as your workforce grows, these sort of overlaps can turn into full-blown payroll migraines.

not another timesheet emailSleepy Payroll Staff (Making Errors in Data Entry)

If you’re lucky you have a payroll staff or you outsource. If you’re not. you DIY. In the end, though, you can’t eliminate 100% of the mistakes. You can only reduce them. It doesn’t really matter if it’s you or someone else making the mistakes – we’re all just human. We all make typos, and anyone can accidentally enter 20 hours instead of 2. That’s 18 billable hours birthed by a typo.

Buddies of the Buddy Punching System (and Other Time Thieves)

This problem is an oldie but a goodie…well, maybe just an oldie. 19 percent of employees (1 out of 5) have participated in some form of time theft, which can cost companies up to 7 percent of their gross annual payroll.

It’s not just about “buddy punching” – employees “covering” for each other and clocking in for one another to steal time. The average weekly “theft” of time is 4 hours and 5 minutes per employee per pay period. This included long lunches and breaks, tardiness, early departures, etc.

Paying the Wrong Tax Rates

At any given moment, the tax rates are changing so whatever rates you first stared using to pay your employees may not be applicable or correct now. Paying the wrong rate means you need to make up any taxes, penalties and interest.

On a regular basis, check your employment tax rates as most tax rates are updated each year. Keep an eye on the following on how to fix payroll mistakes:

  • Federal income tax
  • Social Security tax
  • Medicare tax
  • Federal unemployment tax
  • State income tax
  • State unemployment insurance tax
  • Local income tax

Depending on your location, then keep your eye on any rates for additional taxes.

Classifying Employees Incorrectly

You may employ independent contractors while others are full-time employees. However, when you mix up these workers, it’s a costly mistake. For example, a contractor doesn’t need to be paid minimum wage or overtime wages. Additionally, you don’t withhold employment taxes from their wages. Therefore, if an employee is classified as a contractor, they can lose out on wages and governments will miss out on tax revenues.

When you misclassify a worker then you are forced to pay  the employee and employer’s share of taxes, plus all penalties and interest. In addition, you could even owe back wages to the employee. How can you know if a worker should be classified as an independent contractor or an employee? The U.S. Department of Labor recommends that you use the six-part economic realities test. And if you still are not sure, then file a Form SS-8 in order to avoid misclassification payroll issues. By filing this form, you request that the IRS determine the worker’s status.

Law & Order (Compliance, State Laws and You)

Don’t you just love IRS audits?! How about employee lawsuits for unfair pay?! You might think that regulations that demand you keep precise records of employee work hours are a bureaucratic drag, but they’re actually there to protect you. As are state laws regulating payroll processes.

Sure, you can still comply with regulations while using traditional solutions, or just your good old pen and paper. But it’s simply easier with an app.

payroll errors quote by Colle McVOY

Going Digital – Easier Than Ever

Switching to digital attendance and payroll management is not as expensive or complicated as you might think, or as at might have been when you last checked. You (probably) don’t need to purchase complex biometric attendance systems, or even computerized punch clocks. In fact, you need not look further than the mobile phone in your hand.

Cloud-based mobile app solutions, like Connecteam or Kronos, offer geo-tagged time-clocks, shift scheduling and a lot more. In addition to the major reduction in payroll errors, these platforms also offer a host of features, like real-time information on employee attendance, that can help make your payroll process faster, more effective, and fully compliant with regulation.

Time and Attendance Infographic


What’s Next?

People don’t change, so technology has to. People will always find a way to err or cheat in attendance reporting. However, by switching to a mobile time clock, you can greatly reduce the frequency of errors, save money and increase efficiency in your business. Need help getting everybody on board with the change? Read this: 8 Steps to Introduce Tech into a Non-Techy Business.

Do it all from one place

Connecteam’s employee app is the best solution to have everyone on the same page for multiple purposes. With our mobile-first, easy to use platform, you’ll be able to communicate with your employees in numerous ways, improve professional skills, create schedule and track working hours with GPS time stamps, provide an innovative and efficient on-boarding experience for new employees, get rid of pen and paper by creating digital forms, checklists and reports, and generally take your employee engagement to the next level.

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