How To Run a Payroll Correction

There are all sorts of reasons your small business might need to run a payroll correction, but the goal is the same: to ensure that your team is getting paid correctly and everything is compliant. As much as nobody wants to make mistakes, knowing how to fix payroll mistakes is important before they occur. 

But how do you fix a mistake in payroll? Read on and we’ll cover all the important steps for you.

What is a payroll correction?

A payroll correction is a payroll run that happens off your regular cycle to fix an error made in a previous payroll. For most payroll mistakes, time is of the essence when it comes to fixing them, which is why employers often opt for  correction, or off-cycle, payroll runs in those situations.

Correcting payroll on a regular payroll run. 

You might be wondering, how long does an employer have to correct a payroll when it is wrong? It is possible to correct a mistake in a regular payroll run, but if you do, make sure you are following all state laws in this case. For example, if you underpaid an employee, some states have rules regarding how quickly you must send the payment to fix the mistake. 

Take Oregon, where if an employee is underpaid by less than 5% of their total wages, the employer can wait until the next regular payroll run to correct the error. But if the error was in excess of 5%, then the mistake must be fixed in the next three business days. If you don’t follow the rules, an employer mistake on payroll can be costly. Make sure to check whether you’re following the law with your correction.

Keep in mind that depending on your business’ pay period, it may be a long time before your employee sees their corrected compensation if you use a regular payroll run. Monthly payroll will take much longer than if your business runs weekly or biweekly payroll periods. 

Types of payroll mistakes and how to fix them.

There are a few main types of mistakes you may make with your payroll, and they all involve taxes, wages, and benefits. Basically, anything where money transfers hands is where you should be extra careful to ensure you are getting things right or you’ll have to perform a payroll adjustment.

Underpaid employee.

If you realize you underpaid an employee, you should fix the mistake as soon as possible. Let the employee know they will be receiving additional wages and what they are for. 

Once they’ve gotten the wages, it’s a good idea to have them sign something to acknowledge the mistake has been fixed so you have it recorded in case anything comes up in the future.

Overpaid employee.

If you overpaid an employee, you should check on your state laws before you make a plan to recoup the funds. Some states allow you to deduct the wages from a future payroll. Some states have limits on how much can be deducted, and others don’t allow this deduction at all unless certain requirements are met. Federal law also doesn’t permit deductions that would reduce an employee’s income below minimum wage. 

The one thing you won’t be able to do is withdraw the money from the employee’s bank account. ACH transfers are one way, so if you want to get the funds back, the solution will lie in deducting funds from future payrolls (if allowable in your area). This is a situation where open communication with your employee will go a long way to smoothing things over.

Withheld taxes incorrectly.

If you overpaid taxes, many tax agencies will give back the excess amount as a refund when you file your taxes. If an employee had too many taxes withheld (like if they made an error on their W-4), they should expect a refund when they file their taxes for the year.

On the business side, some agencies will give you a refund and others will use the amount as a credit towards future payments, but will not refund it. Check with the tax agency in question to see what their overpayment policy allows for.

If you underpaid taxes, you should try to correct the mistake as soon as possible. Some taxes, like unemployment, have a quarterly deposit schedule, so you have until the end of the quarter to withhold and pay the correct amount of taxes. Others, like income tax, may have a more frequent deposit schedule, so time is of the essence to get those taxes in on time.

Withheld benefits deductions incorrectly.

This mistake is a little less common, but it can happen. If you did not withhold enough money from your employees to pay for a benefit like health insurance, you can typically make up for it in a future payroll.

Just make the employee aware of the benefit deduction and have them authorize it. If you withheld too much money for a benefit you will likely need a correction payroll. If you overwithheld pre-tax funds this will impact all of the taxes in the payroll, so it pays to check with your bookkeeper or payroll processor to make sure they can handle this correction.

Preventing payroll errors.

The best way to handle payroll errors? Prevent them from happening in the first place. Here’s how to stay ahead of the game.

• Automate your payroll with software: Automated systems reduce human error. Homebase Payroll connects directly to time clocks, ensuring accurate hour tracking and payroll processing.
• Implement regular audits: Regularly review payroll data to catch discrepancies early.
• Train your team: Ensure everyone involved in payroll understands the process and common pitfalls.

Communicating payroll errors to employees

Payroll mistakes are almost inevitable. But how you communicate the error can make or break employee trust. Here’s how to handle it like a pro.

Be transparent.

Honesty is the best policy. Be upfront about the mistake without assigning blame. Use inclusive language and take full responsibility.

• Example: “We discovered an error in your recent paycheck. We’re working to fix it immediately and will ensure it doesn’t happen again.”

Apologize sincerely.

A genuine apology goes a long way. Acknowledge the impact of the error on your employees’ lives and rectify it promptly.

• Example: “We apologize for the inconvenience this payroll error has caused. We understand how important timely and accurate payments are and are committed to resolving this quickly.”

Transparency and sincerity can turn a potential crisis into an opportunity to strengthen trust and show your commitment to your team.

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Prep error-free payroll with Homebase.

Correcting payroll errors isn’t just about fixing mistakes; it’s about maintaining compliance, building trust with your team, and ensuring financial accuracy. When your payroll is accurate, your employees are happy, your business stays compliant, and your financial records are reliable.

Many small business owners might start off with manual payroll or scheduling, time clock, and payroll systems that don’t work well together. The more disorganized your tools are, the more likely an error will be introduced somewhere along the way. 

That’s why Homebase is an all-in-one tool designed for hourly teams like yours. When your tools work together as well as your team should, you’ll see fewer errors and need to run less adjustments. And in case it happens, you can tackle payroll corrections with confidence and keep your business running smoothly. Get started now with Homebase. 

Remember: This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.

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