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Common Payroll Problems (And How to Avoid Them)

Natasa Djalovic
Last update on:
September 5, 2022 8:29 AM
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Businesses face many payroll problems, so payroll mistakes are quite common. In any given year, approximately one-third of employers make payroll mistakes. At the same time, almost a quarter of all employees experience paycheck problems

Sometimes nothing more than innocent oversights, these payroll errors can be pretty costly, resulting in substantial penalties and lawsuits. They can be a reason for undesirable investigations by the IRS or U.S. Department of Labor and state or local agencies.

And if payroll mistakes impact employees negatively, they can damage workforce morale in the company, lower productivity, and increase turnover.

This article will give you an insight into where the real payroll problems lie. It will also offer hints on how to successfully improve your payroll process and prevent payroll problems from harming your business.

What Are Common Payroll Errors?

So let’s begin with clarifying the most common payroll problems that may occur in your practice and then move on to drafting possible solutions.

  1. Misclassifying Employees

One of the most common payroll problems comes from misclassifying your employees.

For example, denying overtime wages to non-exempt salaried staff or classifying your employees as independent contractors are potential violations of the FLSA.

Penalties for such violations can be draconian.

In our blog article, you can learn more about compliance with FLSA and overtime pay laws.

  1. Inadequate Time Tracking

Incorrectly recorded working hours can lead to improper payments and corrections that span multiple tax years. 

Fixing those errors takes time and energy from your payroll team. Plus, the process can be incredibly upsetting for employees, whether underpaid or overpaid, when they must return money to the company.

Regarding overtime pay, it is not just a matter of compensating workers the standard 1.5 times their regular pay rate when they work over 40 hours a week. Payroll problems also occur if you miss a payment in cases such as traveling between work sites or participating in activities outside of regular hours (team building, training), etc.

As this problem directly results from the method of time tracking the employer chooses, they can solve it quickly and efficiently by switching to automated time tracking solutions.

  1. Miscalculating Payment

Miscalculating payment can happen both with salaried or hourly employees. Some common scenarios are:

  • Underpaying or overpaying employees
  • Making incorrect retroactive payments
  • Deducting the wrong amount for benefits, mileage reimbursement, or similar
  • Improperly paying employees who are on leaves

 As resolving payroll errors usually takes between 2 and ten days, your payroll team will need additional working hours to investigate and fix errors.

This can be frustrating for your employees, especially if the payroll problems result in late payments. 

  1. Miscalculating Overtime Wages

Under overtime laws, you must generally pay all your nonexempt employees overtime wages. However, besides classifying them adequately, you must ensure to calculate their overtime compensation correctly, following the FLSA or other relevant - state or local legislation. You need to know which laws exactly your company must comply with.

For example, the FLSA demands employers to pay employees 1.5 times their regular rate for any hours beyond 40 hours per week. States and cities may have different guidelines and legislation. For example, California requires overtime pay for employees who work more than eight hours a day. 

If you fail to pay employees overtime or do it properly, you can face penalties and interest. 

You can learn more about overtime laws and calculating overtime pay in our Resources Center, so check them out.

  1. Inadequate Record Keeping

In an ideal world, you will never have to deal with an audit. But, in reality, the odds are high that the IRS will once come knocking on your business' door.

So if you face an audit from the IRS about payroll problems,  it's crucial to have accurate, complete, and organized payroll records for all of your employees, including their time sheets and pay records. Otherwise, you could face various fines, penalties, and other tax or payroll-related issues.

And don't think you can get rid of the records once an employee leaves; there are various requirements for archiving the documents even after the contract is terminated. You can learn more on this topic by checking out our article How Long Should You Keep Business Records.

TRY TIMEERO TODAY AND AVOID SERIOUS PAYROLL MISTAKES

What Happens If I Make a Payroll Mistake?

Though it may seem straightforward, payroll can be a complex and time-consuming process for employers. Payroll mistakes and discrepancies can cost you violations, penalties, and fines. 

As a matter of fact, payroll mistakes cost businesses approximately $7 billion in penalties for 2021, with the average cost being almost $850 per business per employer. 

Furthermore, when the compensation is not delivered as expected, it can significantly affect employees' lives and cause them to feel dissatisfied and disengaged with their work. 

Since 65% of US citizens live from one paycheck to another, it's no surprise that almost half of the employees will start looking for another job after two payment errors. For companies, this means higher turnover rates and higher costs. 

So, if you make a payroll mistake, you must fix it as soon as possible and keep all the related records. If your faulty payment has already been processed, you must immediately report the issue to the federal and state entities involved. The IRS has to know precisely how much money was paid to each employee. 

How Can I Improve Payroll Processes?  Payroll Traps To Avoid.

  1. Avoid Manual Timekeeping

Compiling payroll can be a hectic process, regardless of the size of your company. Using paper timesheets has proven to be time-consuming and far from perfect. It is, as a matter of fact, a direct cause of many payroll problems.

If you track your team’s time manually, you’ll want to know that the calculation error rate can be as high as 8% of total payroll in organizations that use paper time tracking. And these mistakes aren’t uncommon. 

It is estimated that, at a minimum, an average business loses up to 4% of payroll on clerical errors. “What number is that?”, “Whose name is this?” are some common questions that accompany a paper recording system. 

Paper timesheets are unreliable, hard to read, and easily damaged or lost. They rely on time-consuming, tiresome, and costly manual labor to keep them updated, so they are often inaccurate and faulty. Not to mention how hard they are to archive in case of an audit.

With paper time cards, payroll teams must complete payroll before the due date, which may result in further errors, late payroll, or other payroll problems. A mismanaged payroll process translates into pricey IRS penalties. 

Read our article on paper timesheets to learn about all the disadvantages of this timekeeping method, which can cost your business both time and money.

  1. Avoid Time  Theft

Time theft is when employees get paid for hours they haven’t worked. Even though it is hard to detect, especially with manual paper timesheets, it leads to many payroll problems and is quite costly for the employer due to low productivity and inflated payroll.

The American Payroll Association reports that 75% of companies experience some form of time theft, costing organizations up to 7% of their total payroll annually. 

‍Buddy punching may not seem obvious, but 17% of workers have admitted punching in or out for co-workers. The American Payroll Association estimates that businesses lose more than $400 billion annually due to lost productivity.

Time theft here and there results in enormous losses for companies in the long run. Buddy punching causes businesses 75% in payroll losses, averaging 2.1% of gross payroll. According to statistics, the average employee steals 450 minutes weekly (more than 4 hours!).

Manual clock-in systems encourage time theft and exaggerated overtime by employees. Errors often go unnoticed, leading to wrong payroll recordings and losses to the company. Paper timesheets promote buddy punching, which happens far more often than most employers know.

Paper systems have no employee verification; one employee can enter someone else’s time, which will go unnoticed. At its worst, supervisors or managers are creating a ghost payroll, where they make up hours for non-existent workers.

With digital time tracking solutions and features such as Facial Recognition, you don’t have to worry about time theft ever again.

Read our Guide On Preventing Employee Time Theft, and ensure you only pay for the actual hours worked.

  1. Avoid Manual Mileage Recording

If your company has mobile employees using their personal vehicles for business purposes, you will probably want to reimburse them for the mileage.

Even though mileage reimbursement is not a requirement at the federal level, such compensation is considered a good business practice. Certain states, such as California or Illinois, have very stringent reimbursement laws. Failing to reimburse your employees for mileage can have many adverse effects on your business and, if required by the law, is also quite costly.

However, to properly compensate for the mileage expenses, your method of tracking mileage needs to be accurate and enable relevant and precise records. 

The problem with paper-based templates for tracking mileage is the same as with paper timesheets - they are prone to human error and manipulation and, most often, highly inaccurate. 

Problems that occur when compensating your employees for mileage are, in that sense, quite similar to some most common payroll problems.

Using GPS-tracking solutions that track both the time and the mileage and automate the payroll are the best solution for avoiding payroll problems.

avoid payment problems with Timeero
Track time, location, mileage and much more with Timeero

To learn more about how to reimburse your employee’s mileage, read our Guide to Employee Mileage Reimbursement.

  1. Automate Your Payroll

Payroll consists of calculating employees' earnings, benefits, and tax withholdings. 

It can also include business records such as the distribution of paychecks and employee wages. When done manually, payroll is a costly and time-consuming process.

Automating your payroll will reduce human input, prevent the most common payroll problems,  and streamline payroll processing using the software. Payroll automation helps you in various tasks, such as calculating tax withholdings, filing taxes, creating payroll reports, etc. 

 Using payroll automation, and integrating it with your time-tracking solution, can save both time and money and guarantee accurate payroll.

How to Solve Payroll Problems? Switch to Digital Solutions. 

You can avoid all the above mentioned issues by switching to digital GPS time-tracking solutions. 

Digital timesheets help employers track their workers’ hours quickly and accurately. You don’t have to follow up with staff members about their timesheets. The app automatically sends reminders to employees to submit their timesheets. 

According to research, digital timesheets save your business nearly 5% on payroll spillage. Crew members can punch in or out quickly via smartphones, while GPS and geofencing capabilities can ensure they are in their workplace when clocking in their shifts. Digital time tracking has employee verification which discourages buddy punching.

And if you have mobile employees, mileage tracking can help you accurately reimburse them.

Furthermore, the payroll team will no longer have to deal with questions such as “How many vacation days do I have left?” from workers. With digital timesheets, employees can access their hours on their phones and have all the answers.‍

Accountability is crucial regarding hours worked by employees, attendance, and schedules. Unfortunately, tracking employee hours and attendance can be a robust process. Digital time tracking has revolutionized how employers monitor and manage their employees and ‍can support you in promoting accountability at the workplace.

avoid payment mistakes with Timeero
With Timeero, See Where Everyone Is at Any Time

How Can Timeero Help You Fix Your Payroll Problems? 

As Timeero integrates with the most common payroll solutions, you can rest assured all the payroll problems are efficiently solved.

Take the initiative today and start our 14-day free trial to curb time theft and losses experienced in payroll.

AUTHOR
Natasa Djalovic

Natasa is a writer specializing in the IT and software industry with 6+ years of experience in content writing and online marketing. During that period, she wrote more than 1,000 articles and several ebooks. She majored in English language and literature and loves cats, sneakers, and candy. When she's not working, she's probably binge-watching Netflix.

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