Payroll mistakes are costly in every way.
There are the direct, administrative costs spent to devote staff time to correcting payroll errors. These costs can pale compared to fines, penalties and potential legal costs for noncompliance with any of the state and federal labor and tax laws that apply to your payroll. Last, since most payroll errors tend to underpay rather than overpay, companies with high rates of paycheck mistakes also bear the burden of poor company/employee relations.
Fortunately, companies have options to avoid these most common payroll errors.
The root error: misclassifying your employees
Not all employees are actually employees. Forbes magazine recently wrote about research from Princeton University that attributes 100 percent of job growth over the past decade to contractors and temporary employment. Even employees don’t share the same classification. Each one needs to be properly classified as either exempt or nonexempt under the Fair Labor Standards Act. Misclassifying a worker is a root payroll error because nearly every payroll task you run based on this error will cascade into its own set of miscalculations and noncompliance.
Internally, HR and accounting should share clear guidelines to determine how to classify someone on payroll. On a high level, the determination whether someone is an employee or contractor depends on how much control your company has over the person in terms of when and how they complete their work. In regards to determining FLSA exempt or nonexempt status, that’s a formula based on how much the person is paid, how their pay is calculated, and what their job duties are.
Consult with your tax accounting and legal departments to set up the checklists and best practices HR and payroll accounting should use to classify someone’s position properly. If there’s a particularly difficult case, you can request the IRS to make the determination by providing information on Form SS-8 regarding contractor status or contact the Department of Labor regarding exempt/non-exempt status.
GIGO: data garbage in results in data garbage out
Your back-end processes for calculating hours worked and overtime worked can be absolutely stellar, but if they’re run on garbage data, you’re still going to end up over- or underpaying employees. And that happens – often.
According to The Work Institute’s “Engaging Employees through Payroll” survey, more than half the American workforce experiences at least one paycheck error during the course of their career. A quarter reported being underpaid, which throws a huge hit on your employee good will. While only six percent reported being overpaid, the survey found they’d have to be overpaid, on average, by $463 before letting their employers know.
Hour tracking systems that still rely on paper and pen, or paper time cards, have innumerable points of failure, including the point at which that data is entered into your payroll system. The more complex the time and task tracking needs to be (say for an employee who gets paid differently for different job roles) the greater potential these manual-type data collection and entry processes will spew out erroneous paychecks.
The reliable solution is to automate data collection when people come in and leave, take breaks, or switch tasks. Biometric employee time clocks provide the highest degree of accuracy, while barcodes and PIN numbers offer a great improvement over the manual time-collection methods.
Misclassification x GIGO = Costly Noncompliance
Providing erroneous W2s and 1099s, and miscalculating your state unemployment tax are all common payroll errors. They’re inevitable errors if your company suffers from poor data collection methods or misclassifies workers.
Using an automated data collection method that provides an easy interface for workers to keep their payroll demographic data as up to date as the time clocks track their time, will help ensure that tax forms produced by your payroll system are accurate and compliant.
Building a reliable framework
Managing payroll is complicated. Simplify it and reduce your risk for payroll errors by setting a strong framework that ensures accurate current data collection. With that foundation, many of your most common payroll errors can be avoided.
To learn more about a time and attendance solution that can save your payroll department valuable time and costs, you can contact us today or download our free eBook, How the Right Time Clock Can Improve Time and Attendance Reporting.