10 Payroll Processing Mistakes To Avoid

A big challenge for any type of business today is the effective execution of the payroll management process. The payroll and HR of the organization need to contend with the constant changes in regulations and the different layers of compliance that is required at different levels in the industry. There could also be substantial changes with new employees joining and old employees leaving. There could be changes with independent contractors as well as vendors.

With the number of issues, a lot of businesses think that the payroll process requires improvement in many areas. Whether you already have a payroll system in place or not, it is time you understand the importance of payroll in your business and make the right decision. If you want to make the most of your payroll system, here are the ten mistakes you should avoid.


A lot of businesses carry out the payroll process manually. Due to this, the payroll staff is remains overworked for most of the time. A manual system will need a huge amount of paperwork in addition to the extra burden on the HR. Any errors made in the data entry can lead to payment issues as well as a misapplication of rule. There will be higher mistakes due to lack of efficient and experienced staff. According to Bob Kemble from Click And Mortar Accounting, using a professional accountant is the best way to avoid mistakes on payroll processing.


Another problem is simply keeping the important documents and records organized in appropriate and accurate manner. It is about work flow. If you do not keep the documents and files in uniform filing process, it could mess up the system. This is a problem which can be easily solved by a payroll system.

Software setup

The reality is that all payroll programs will not be compatible. This means the program which is used for the employee profiles will have a different system as compared to the one used for pay and for benefits. Some companies find this is more complicated with the incompatible programs that are used for measurement of employee performance. Sometimes setting up the payroll process can lead to errors and mistakes.

Employee absence

If you have to track manually the vacation as well as sick days of the employees, there is a huge scope of making mistakes. If you use time cards, it could cause the company to become prone to its misuse. In a payroll, you can track employees who are not present for some reason. It will be effective in increasing productivity and will help achieve effective planning.

Payroll deductions

In majority businesses, processing the payroll deduction is one of the most complicated part of the payroll process. This is due to the number of laws which apply to the deductions and it is easier for HR to make errors in the same. This is a common area of mistake in payroll processing and is also a very complex task.

It is important to consider how payroll deductions and allowances apply in different countries and jurisdictions. For example, an international business that is administering a Spain payroll, will have different rules to follow than in one of their subsidiaries in another country, particularly if it is outside the EU.

A calculator, bills and a tax return

Overtime payments

The Federal laws need the employers to pay employees for overtime. This is for the additional hours worked in addition to the regular work week. The specifics will differ based on the state and the organization but it is important to pay the employees in case of overtime. The payroll process can lead to mistakes due to the overtime laws and exceptions that are provided.

Court ordered garnishments

The nature of employees at having court order garnishments from their income basically means a lot of errors. It is in this situation when the employer needs to meet the terms of the court for an income garnishment and he will have to pay penalties if he fails to do so.

Regulatory compliance

Payroll regulations and rules change and these changes will have an impact on how the payroll is being processed at the state or federal level. Most businesses strive to remain updated with the changes but they sometimes find the process overwhelming and this leads to gaps in compliance due to lack of adequate information.

Classification of employees

Small businesses hire different types of workers including the freelance contractors, temporary employees, vendors and permanent employees. Since there are different types of workers, there is a need for classification which can lead to payroll mistakes. It is important for the workers of the company to be classified correctly for the purpose of tax because one mis classification could lead to them failing to pay their taxes. If they fail to pay the taxes, it could lead to IRS asking businesses to pay tax on the income paid to its employees in addition to the penalty and fine.

Tax deposit and payments

Deposit of tax should be made on the 15th of the month. Now, if the tax deposits and payments are not made by the due date, there will be a penalty and it could be about 0.5 percent of the tax amount due each month. There could also be an additional penalty for deposits of 25 percent if the payment is very late.

These are a few mistakes which are often made by small businesses. It is the inappropriate management of IRS forms. Failing to issue 1099 is a major problem for those companies that use independent contractors for business. The company will have to issue an IRS 1099 to a business or an individual who is paid $600 or above in one year and copies of it should be forwarded to the IRS.

If you fail to do this, it will be very costly and you could be fined with penalty for each form that is not issued. The company will also have to pay the additional 31% of amount which was paid in the taxes. Hence, even a small mistake can cause huge damages to the business. If the IRS estimates that the business neglected to give employees their forms, it can impose penalties on you. In addition, you also have to consider those employees who are no longer associated with you.

There is no denying the fact that payroll is an integral part of every business. It might not be possible for an accountant to handle the payroll manually and it could lead to numerous errors as well. Many businesses try to save on the cost by opting for manual accounting but they end up incurring huge expenses at a later stage. This could be due to negligence of form issue or due to a miscalculation.

Using a desktop computer at an untidy desk

It is always advisable to prepare well for the year ahead and invest in a quality payroll system. Payroll professionals or the accountant can save a lot of time, money, and effort by automating operations like time, expense, and project tracking. Your employees’ pay stubs will always precisely reflect the hours they worked if you use automated payroll systems. Using paystub template forms in a pay stub generator payroll software to create pay stubs lets your staff spend their efforts and time on other revenue-generating tasks.

Apart from saving the time and money, you will be able to enjoy peace of mind knowing that the payroll processes will be handled efficiently and accurately. It could be an ideal decision to outsource the service and concentrate on areas in the business that you have an expertise in. You will also be rest assured that the liability for compliance and accountability rests with the vendor. You will not have the pressure of being compliant with the constantly changing rules and regulations in the industry.

Choose a service provider who is reliable and is known for excellent client servicing. You cannot change the vendor time and again and this is why you need to choose one who is a perfect fit for your business. Consider the business requirements and the number of employees in the business when outsourcing the payroll system. It will definitely be worth the money and efforts.

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