The payroll department is responsible for the delivery of payroll checks, maintenance of employees’ and ex-employees records, wage deduction, calculation of bonuses & overtime, and most importantly, ensuring compliance.
This is the only department that deals with and manages functions that impact almost everyone in the organization. A simple delay can be a talking point across the organization, and an innocuous mistake can attract compliance problems for the business. Well-maintained payroll management is not visible, but a minor issue can trigger ripples across the company which is why businesses must avoid making payroll mistakes at all costs.
The first step a business could take in avoiding these mistakes is to be aware of the mistakes that companies often commit. As a remote accounting firm specializing in payroll processing and management, we managed payroll processing and assured many small, medium and large businesses. Here are the most common payroll mistakes that most companies commit:
Misclassification of employees: The most common mistake that eventually comes to hurt your payroll processing is the misclassification of employees. Benefits, legal rights and protections differ based on the classification of employee. For example, minimum wage and overtime pay are accorded to employees under the law, but not to independent contractors. Similarly, exempt and non-exempt employees will have different legal rights. Not only will this misclassification impacts the benefits and privileges of the employees it also may attract tax audit.
Missing payment deadlines: Payroll processing contains so many moving parts that it is easy to miss the deadline, which a few businesses will. Nothing erodes the relationship and reputation of the firm faster than missing payment deadlines; unfortunately, it is another common payroll mistake most companies make. Few states also have payroll frequency requirements which could further exacerbate the situation when payroll management needs to accommodate accurate processing.
The trouble is much more when businesses miss tax deadlines. In addition to legal fees and penalties, missing payroll tax deadlines can bring legal concerns.
Misapplying tax incentives and incorrect reporting: The pay includes salary, bonuses and overtime, which must be reported to IRS. Including these essential components, there are other small exchanges outside the standard compensation which businesses need to remember. This can include sales incentives, gift cards and more, which may attract penalties from IRS.
Incorrectly applying or not applying the tax incentives, assigning wrong income transactions, and misapplying fringe benefit taxes are other common payroll mistakes that can spell trouble for the organization. It always helps to consult a tax professional for tax preparation to avoid the potential risk of tax problems. At Outsourced Bookkeeping we also offer tax preparation services for any business that need help. You can find more about our tax predation services here.
Incorrect work hours recording & expenses outside payroll: A minor mistake that could lead to significant repercussions is ignoring the inclusion of expenses in the payroll. Not disclosing the costs through the payroll may be the easiest path to take, but it can cause serious problems.
Similarly, an incorrect record of work hours will impact the daily rate and may disturb the overtime calculations. To ensure that the work hours are adequately calculated.
Ignoring paper trials & Failing to keep and manage records: Lack of sufficient paper trials of payroll transactions and other vital details is the most common cause of headaches during audits. With the rise in technology, most small and medium businesses ignore the paper trail, which eventually burns their hours and days in catching up with the truncations; at Outsourced Bookkeeping, we always advise our clients to record transactions of every employee, which includes promotion, overtime, allowance, deductions, bonuses and company contributions.
Every payroll mistake discussed above could be partly a symptom of the root cause: the failure to maintain and manage the payroll records. Payroll records must be thorough with payment rates, hours worked, and payroll dates with other comprehensive details. According to FLSA, employers must maintain a 3-year worth of records, and some estates even ask for more information.
While this can be cumbersome, maintaining an extensive record of payroll data reduces the chance of committing mistakes like misclassification, lack of paper trail and incorrect tax reporting. It runs the payroll smoothly and keeps the organization safe in the vent of future audits. However, only some businesses can afford a comprehensive payroll management process due to insufficient resources. If you are one of them, you can consider outsourcing your payroll processing to small accounting firms with the right expertise and track record – like us at Outsourced Bookkeeping. Know more about us here: https://www.outsourcedbookeeping.com/