Managing payroll can be one of the most time consuming and error-prone challenges facing business owners today. With labor regulations and litigations on the rise, payroll errors can also be costly to the business. After all, over 40 percent of businesses are fined over $850 annually for payroll mistakes. Pair that with employee churn due to payroll errors and costs can skyrocket.
So, what can businesses do to avoid making mistakes on their payroll?
1. Onboard New Employees Correctly and Keep Them Updated
From the moment a new employee is hired, take the time to correctly document all employee information to prevent payroll issues in the future. Create verification processes for both employees and managers to confirm that new employees have correctly entered their name, social security number, bank account deposit number, deductions for benefits and 401(k), and have accurately filled out their information on their tax forms.
An employee self-onboarding software can help you complete paperwork electronically before the new hire’s start date and help you include e-signatures
to ensure the employee has verified the information.
Make sure your current employees are also following a tight process for updating their information such as changes in their address, marital status, and tax deductions. A best practice is to set up quarterly reminders for all employees to confirm that nothing has changed in their employee information. Be sure to also keep your employee job descriptions updated as well to protect your business from misclassifying your workers.
2. Keep Uncle Sam Happy
To prevent the most frequent and costly mistake — payroll taxes — take the time to stay abreast on the latest federal, state, and local tax laws. This includes making sure your business is correctly reporting employee income tax withholdings, unemployment taxes, and classifying employees correctly (e.g. exempt vs. nonexempt, employee vs. independent contractors) to prevent wage and hour lawsuits. Make certain you’re also paying your payroll taxes on time (every payday) to avoid heavy penalties and interest charges.
Additionally, to protect your business from a potential lawsuit of back pay claims of unpaid hours worked, properly track and document your employees’ time worked for a minimum of 3 years of payroll. Document all hourly wages, daily and weekly hours worked, total earnings, and overtime pay. Automated time tracking tools can help to accurately keep track of employee hours worked while formally documenting it for potential future evidence.
Consider also outsourcing to an accounting or a payroll company to ensure tax payments are made on time and the complexities of the local, state, and federal mandates are properly managed so your business can stay compliant.
3. Eliminate Human Error
There are many common human errors business owners can make when managing payroll. These can include giving an employee a manual check (e.g. as a bonus or award) and forgetting to record it on payroll, incorrectly calculating hours worked thus underpaying or overpaying your employees, miscalculating PTO, and the many tax reporting mistakes listed in tip #2.
Processing payroll manually increases errors because you’re pulling info from many different sources such as Excel spreadsheet tabs, tax info, timesheets, and deposit info. Poor record keeping and organization can increase the likelihood of mistakes when doing payroll, but it’s also incredibly time-consuming. Nearly a quarter of all small business owners spend at least six hours a month dealing with payroll.
Having a time tracking software that’s integrated into any payroll management software eliminates the human aspect of payroll management and instead uses a fully automated system for accurate payroll and proper documentation to address compliance. As an added bonus, these tools significantly reduce the time spent managing employee schedules, timesheets and payroll from hours to minutes per month.
4. Empower Your Employees
Preventing payroll mistakes (and potential future litigations) can be as simple as giving your employees the tools and processes needed to communicate with you and your managers about any payroll inaccuracies.
If your employees catch payroll discrepancies, have a formal process in place so they can report these issues and more important, you can quickly resolve the discrepancy before they become bigger problems (i.e. litigation). Use an easy communication tool or payroll discrepancy form where they can notify you or your managers on any timesheet or payroll errors.
Time and attendance tools can also allow your employees to review and verify their hours worked when they clock in and out which provides a layer of attestation protection for the business.
5. Increase Security
Managing payroll manually or in-house renders your business vulnerable to payroll fraud such as identity theft and misappropriation of funds. Fraudsters from an outside source can also steal employee tax and salary data if the business doesn’t have proper safeguards in place.
Using cloud-based solutions for time tracking integrated with payroll services can mitigate security risks, as these providers have advanced security measures in place such as two-factor authentication, data encryption and security certifications to ensure your data is properly stored and protected. Additionally, most payroll providers have built-in security features that can alert your business of payroll fraud.