Payroll errors and how to avoid them

Running payroll is complicated, even for the experts. It’s all too easy to make payroll errors, especially if you’re a small business owner with no payroll training and no dedicated bookkeeper.  However, these small mistakes can have a big impact on other elements of your business. Being aware of the most common payroll errors is a great first step to avoiding them in your own organization. 

It’s also smart to understand the consequences, because they can be serious. Consistent payroll errors can lead to poor staff retention, trouble with taxes, legal issues, and other payroll problems. While there are a few things you can do to avoid payroll errors and manage payroll properly, the smartest move is using online tools to help you automate your payroll process and make mistakes a thing of the past.

What is payroll?

Payroll is the process of paying your employees. It can also refer to a list of a company’s paid employees or the amount of money paid to those employees for a set period of time. 

The payroll process includes tracking employee hours, calculating wages, withholding deductions for Medicare, Social Security, and unemployment taxes, filing payroll taxes, and delivering payment. All this needs to be done in compliance with local labor laws.

While payroll may not be your favorite task, it’s important that your employees know they’ll get paid on time every pay period. Reliable payroll creates trust, keeps morale high, and ensures the financial stability of your company. Plus, failure to comply with your local tax or labor laws could result in hefty penalties. 

Did you know? The penalty for late taxes is 5% per month of your total tax bill. Over the course of half a year, that’s 30% in penalty fees. 

Payroll is complex and can be time consuming, especially for smaller companies without a dedicated payroll department. It can be a challenge to stay on top of labor laws, keep records organized, manage changes to schedules, and handle loads of paperwork—all of which takes time from other aspects of your business.  

Common payroll errors

With something as finicky as payroll, errors are bound to happen. But there’s good news. If you know where mistakes are typically made, you can put systems in place to avoid wasting time, money, and potentially hurting morale. Here are some of the most common payroll errors companies make on a monthly basis. 

Not tracking employee hours

Without a time tracking program in place, it’s easy to lose sight of which hourly employees did what and for how long. This almost always leads to mistakes in payroll like miscalculating pay, missing payments, and filing taxes incorrectly. All of these things can affect your business for years after the fact.

But it’s not just about the money. Not tracking employee hours can also have a negative impact on resource planning, project management, and employee morale. When you’re not sure if your billing and payroll is accurate, it’s tough to plan for the future. It can also lead to issues with employee discipline and trust. 

This problem can be solved easily by finding a reliable way to track your employees’ time. Consider investing in a digital time tracking solution like Homebase. Look for something to help track hours, breaks, overtime, and more. It should also store your data safely and accurately in one place. 

Not accounting for overtime

If you’re miscalculating overtime or you’re not accounting for it at all, you can face more than a disgruntled employee. Companies that don’t pay overtime correctly can find themselves on the hook for hefty fines and interest. 

Under overtime laws, you need to pay all your nonexempt employees overtime wages and you need to calculate their overtime correctly, following your state or local laws. The FLSA states that employees must be paid 1.5 times their regular rate for any hours beyond 40 hours per week. However, states and cities may have different guidelines and legislation.  

Minimum wage laws at a glance: Check out this interactive map with applicable minimum wage laws for every state. 

Overtime errors, like time tracking errors, are generally the result of faulty record keeping. This can happen if you misclassify your employees, aren’t up-to-date on your local labor laws, or haven’t counted employee hours properly. This is another scenario where a digital time clock or payroll solution is a solid bet. With Homebase, you can calculate overtime right in the app and identify errors automatically before exporting your records.

Incomplete or disorganized record keeping

Incomplete or disorganized record keeping can affect your business negatively in several ways. At best, it makes your admin time more complicated than it needs to be. At worst, you’ll face an audit without the information you need. It can also result in higher labor costs, poor decision making, and cranky employees. 

There are a few signs that your record keeping needs a tune-up:

  • You have a hard time tracking down information. Lack of organization eats up valuable time and productivity that could be spent on growing your business.
  • There are several versions of your documents floating around. If you have multiple versions, revisions or edits could be made by multiple people. This makes it difficult or impossible to know if your records are accurate. 
  • You don’t track retention or destruction timelines. The IRS requires many business documents to be kept for a specific period of time. If you’re tossing your documents too early (even if it’s in an attempt to stay organized), it can lead to thousands of dollars in fines.
  • You don’t have a backup system. If there was a fire, would all your records be lost? It’s critical to have an offsite backup system like cloud storage or a backup server.

To avoid the pitfalls of disorganized record keeping, invest in a product with simple central document storage. Homebase securely stores all your important employee documents in one easily accessible place for up to four years.

Miscalculating pay

An incorrect paycheck can be frustrating for any employee, especially if it means late or missed payments—or worse, having to return money. Miscalculations also waste time because you’ll need to spend hours finding and correcting errors—and that’s on top of the five hours it typically takes small business owners to run payroll

Miscalculating pay can erode employee trust and even put them in a tough position. In the time it takes to get their paycheck right, employees could have trouble paying their bills. 

Pay miscalculations can happen with salaried or hourly employees. The most common scenarios include:

  • Overpaying or underpaying employees
  • Making mistakes with retroactive payments
  • Not paying employees on time
  • Deducting the wrong amount for benefits or other payroll deductions
  • Miscalculating pay for employees who are on disability or other leaves

The easiest way to avoid pay miscalculations is by automating your payroll. Using a digital tool helps eliminate errors caused by manual data entry and dealing with paper. Homebase can help you run payroll in just a few clicks, saving you time and reducing errors.

Consequences of payroll errors

Payroll errors cost you time and money, but there can be more serious consequences for those mistakes. Miscalculations are no small thing if you can’t retain employees or you’re forced to shut down your business completely. Here are a few of the consequences of payroll errors.

Problems with staff retention

If you’re consistently failing to pay your employees properly, it affects their ability to pay their bills, their overall wellbeing, morale, and productivity. And if your staff can’t trust you for a reliable income, they’re not going to stay. Pay is the number one reason people change jobs. Of those who left their previous employer in the past year, 63% did so for better pay and opportunities for growth. At a time when competition for workers is fierce, it’s even tougher for a business that has a reputation as a poor payer. 

Tax trouble

If high turnover and low morale aren’t bad enough, payroll errors can have tax implications that may impact your business in a big way. If there’s an error on your taxes and you don’t report it on time, you might face fines and penalties, including retroactive overtime pay and back taxes. Monetary penalties affect your cash flow, and make it difficult to plan properly or cover your expenses. 

Legal woes

While mistakes are mistakes, submitting a tax return that you know is incorrect, or not filing your taxes at all is fraud. This comes with huge fines, the possibility of jail time, and a definite loss of reputation. Most small businesses are unable to recover from this situation. You could also find yourself up against lawsuits from former employees if you don’t correct payroll errors in a timely fashion.

Bookkeeping can help you stay on the straight and narrow, but it’s expensive. An in-house bookkeeper means a salaried employee, plus the time to find and hire the person. Outsourcing these responsibilities comes with a big overhead cost. Instead, try an online bookkeeping tool as the most cost-effective solution for your small business. Homebase simplifies the payroll process, automatically tracking hours, wages, taxes, and more.

How to avoid payroll errors

Avoiding payroll errors means staying super organized, which is easier said than done if you don’t have a dedicated bookkeeper. Focus on a few key things to keep errors at bay:

  • Clean up your current records. If your records are incomplete, it’s time to review everything and ensure you have all your employees’ details. You’ll need their social security numbers and any other info that might affect their pay. 
  • Set up alerts. Schedule everything, from when to start payroll so everyone’s paid on time, to when an employee exceeds their tax threshold. Alerts keep you accountable and ensure you don’t miss critical deadlines.
  • Use separate accounts. Keep a separate account that’s dedicated to payroll expenses like taxes and paying employees. It’s easier to stay on top of payroll-only expenses when you’re not looking at them alongside operating costs. 
  • Take advantage of payroll tools. This is the best way to avoid payroll errors. Payroll and HR tools can track employee hours, convert time sheets to wages, calculate taxes, safely store everything in one place, and help you pay everyone on time. 
Did you know? Software like Homebase offer an affordable way to manage your hourly team. Learn more about our small business HR and compliance tools.

Make a mistake, even with provisions in place? It happens. And when it does, you should act as soon as possible. For most small payroll errors you can do one of the following:

  • Cancel your payroll immediately, update your error, and reprocess
  • Run a separate manual payroll that only adjusts for employees affected by the error
  • Make adjustments on your next payroll to account for previous mistakes

If the mistake is more serious, you should report to the appropriate state and federal entities right away. The longer you leave errors unaddressed, the worse the penalties and fees become.

Tools to help avoid payroll problems 

Use software designed to automate and simplify payroll as a smart investment for your small business. These programs help streamline everything from time tracking and scheduling to paying your employees on time. Here are some of the most useful tools for small businesses.

Digital Time clocks

An online time clock, also known as a punch clock app or time tracker, is a digital way for employees to clock in and out of their shifts. The best digital time trackers connect with your timesheet or time tracking software, and automatically calculate hours and wages for each team member. Online time clocks help eliminate problems like buddy punching and time theft.

Scheduling apps

Scheduling apps help you move from paper scheduling to an online schedule. When you have an online schedule, you and your team can access shift information in real time from any device. These apps can also send your team reminders about their schedule and alert them to changes. Scheduling apps help you stay staffed properly, optimize shifts, and make team communication much easier.

Automated Timesheets

Digital timesheets automatically calculate total hours and they’re completely paper free. Mobile timesheet apps even tally up paid and unpaid breaks and overtime so you can stay compliant with local, state, and federal labor laws. These tools make running payroll much simpler and reduce human error in a big way.

Payroll apps

Doing payroll manually is a headache. Instead of spending hours poring over timesheets and deductions, you can use a payroll app that does the calculations for you. If you’re using an online time tracker as well, a payroll app can automatically convert hours to wages, handle the tax calculations, send direct deposits, and file the payroll taxes to make. Since everything is tracked and stored in one place, payroll apps make it easy to avoid mistakes.

Solving payroll errors with Homebase

Homebase is designed especially for small businesses without dedicated HR or payroll. Our suite of time tracking, timesheet, and payroll tools help you eliminate excess paper and make your payroll smooth, efficient, and error free.

By keeping all your data in one place, hours worked are instantly calculated, breaks and overtime are tracked, and it’s all synced to payroll so mistakes are easily avoided. Since payroll comes with a lot of questions—even when it’s automated—we also offer the customer support you need to run payroll with confidence. No more stressing about missed errors, tax, health insurance, and other deductions.

Is your business struggling with payroll errors? Get Homebase for everything you need to run easier, more accurate payroll in a few clicks.  Get Homebase payroll today

Payroll errors FAQS 

What are payroll errors?

Payroll errors are mistakes or miscalculations made during the payroll process. Common payroll errors include misclassifying employees, miscalculating pay, not accounting for overtime, and not tracking hours properly. Most payroll errors can be fixed, but it’ll cost you time and money. Plus, it can lead to more serious issues like low staff morale and retention.

How can you prevent payroll errors?

You can prevent payroll errors by staying as organized as possible and by focusing on a few key things. Go through your existing records to make sure they’re complete, make sure they’re stored in a central place and filed properly, set up alerts so you don’t miss important deadlines, and use a separate account for payroll expenses. The best way to prevent payroll errors is by using digital tools like Homebase’s timesheet tool, time tracking app, and payroll app. When you automate your payroll process, you reduce human error and make fewer mistakes.

What are the consequences of payroll errors?

The consequences of payroll errors can have a big impact on your business. While a pay miscalculation is a small mistake, consistent payroll errors may lead to lack of trust, low morale, and issues with employee retention. If you develop a reputation as a poor payer, you’ll have an even tougher time in an already tight labor market. If you’re making errors on your taxes, you can face hefty fines and penalties which affect your bottom line. And if you fail to correct your mistakes in time or don’t report them at all, the consequences of payroll errors can be as serious as jail time.

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