5 Payroll Pitfalls (And How to Avoid Them)

Managing the work associated with processing payroll can be a challenge. Whether you’re a new business owner or a seasoned employer, mistakes can happen. And when they do, the repercussions can be significant. We’ve put together a list of five payroll pitfalls that can impact your business, as well as tips to avoid them.

Tax Withholding Errors

When a new hire comes onboard, they fill out paperwork that indicates their tax withholding status, as well as the location where they live. This information determines the proper tax requirements, including how much is withheld from each paycheck. Failing to adhere to the tax regulations or collect this information can put your business at risk.

Failure to Comply with Legal Requirements

There are countless laws that pertain to labor and pay. Some apply to all employers operating with the state or country, while others apply to companies with a specific number of employees. Understanding the legal requirements associated with your business is an absolute must.

Compliance is a challenge for many employers, but it’s something that no one can afford to overlook, especially a small business owner. Some laws are more well-known, such as the minimum wage that applies in the state (or on a federal level), while others aren’t as familiar. For example, do you know how to calculate income to determine which of an employee’s wages are subject to garnishment? A mistake in this area could be costly, not to mention the impact on employee morale and overall satisfaction. It’s one of the more concerning payroll pitfalls that can impact a small business owner.

Poor Handling of Records

Employers often have sensitive information on employee records. Examples of such information include Social Security numbers, addresses, and bank account details (for direct deposit). It’s up to you to incorporate security measures and access control to ensure that only authorized individuals can view this information.

Disorganization of records can also cause problems, such as missing a payment or failing to follow up on something that needs urgent attention. Make sure your process for managing records is secure and consistent.

Implementing WorkforceHub is an excellent way to say goodbye to filing cabinets and other manual processes. With a virtual filing cabinet built into the HR side of the platform, this tool manages documents and ensures that only those with approved access levels can get to them. Plus, employees can view other vital documents whenever they need to, such as the employee handbook or important policies.

Misclassification of Employees

Misclassifying employees is a common mistake that can have big consequences. If this problem occurs, you could end up paying an employee too much or too little. Additionally, your company may be held responsible for non-compliance with legal regulations.

Classifying an employee involves determining whether they are non-exempt (paid hourly) or exempt (paid a salary). In order to be classified as exempt, an employee must meet certain criteria set forth by the Fair Labor Standards Act (FLSA). A non-exempt employee must receive overtime pay (time-and-a-half their standard hourly wage) for all hours exceeding 40 during a week.

Misclassification can result in FLSA-related fines and require a lot of extra work, including paying an employee for overtime hours for which they weren’t paid properly. Additionally, it can cause mistrust among members of the workforce and impact overall morale.

Incorrect Pay Calculations

Employees expect their paychecks to be accurate and on time, every payday. But when this doesn’t happen, trust in the organization tends to decline. Some employees may choose to leave over incorrect paychecks, dropping the retention rate and impacting the workplace. Miscalculations in pay also waste a lot of time because they have to be corrected, often outside of the normal payroll cycle.

Various issues can result in inaccurate pay, but one of the most common is incorrect time data. If employees are entering their hours manually or guessing on shift start and end times, your business will almost certainly face problems. Rather than taking the risk, implement a time and attendance system that ensures accurate data. WorkforceHub is the ideal solution for all your hourly workers, as it’s highly flexible and easy to use.

By addressing these potential payroll pitfalls before they happen, you can protect your company and maintain a good relationship with your employees.