Nobody likes to make mistakes. It’s always a good idea to try to fix your mistakes as soon as you realize them, and this holds true for running payroll. If you over or underpaid an employee, withheld taxes incorrectly, or made another payroll-related mistake, then it is important to try to correct it ASAP. This is where a correction payroll comes in.
What is a correction payroll?
A correction payroll is a payroll run that happens off of your regular cycle to fix an error that was 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 to run a correction, or off-cycle, payroll runs in those situations.
Correcting mistakes in a regular payroll run
It is possible to correct a mistake in a regular payroll run, but it is important to 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.
It may be alright to wait until your next regular run for the correction payroll, or that may be too long in your area. It pays to check and make sure you are following the law with your correction.
Types of mistakes and possible remedies
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 correction payroll.
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. If it is alright with the employee, this may be a time when you should write a physical check so they can get the wages faster.
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.
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.
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.
Prevent mistakes to avoid correction payroll
It goes without saying that prevention is the name of the game when it comes to payroll mistakes and corrections. It is a good idea to put systems in place to help your team prevent wage and tax issues.
Specifically, an automated payroll solution that connects to your time clock can be a big help towards gathering hours correctly. It is also important to be able to import hours from your time clock right into your payroll system so you can prevent entry errors.
Homebase Payroll instantly converts your timesheets into hours and wages and sends the correct payments to employees, the state, and the IRS. This way you can avoid mistakes and finish the job fast.