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The 5 Most Common Payroll Errors (And How to Avoid Them)

Payroll administration involves ensuring that your employees are paid correctly, on time, and in accordance with applicable laws. Employee payroll, on the other hand, may be a minefield for errors if you don’t have the necessary tools and resources. This can cost your employees and your company time and money. To identify and avoid the most common payroll problems, we have put together this blog about the 5 most common payroll errors (and how to avoid them)

1. Miscalculating pay

It can be extremely frustrating for an employee when they receive an incorrect paycheck.  Not only is it frustrating for employees, but it is also frustrating for whoever may be in charge of payroll, as hours or even days need to be spent investigating and correcting errors outside of the regular payroll cycle.  In order to keep employees happy, it’s crucial that everyone is paid correctly. 

Common miscalculation examples include:

  • Overpaying or underpaying employees
  • Missing the first paycheck for new employees
  • Deducting the wrong amount for benefits or other payroll deductions
  • Improperly paying employees who are on leave

2. Incomplete or disorganised records

If your payroll process is unorganised, it can be bad news.  Relying on manual data entry, or a huge amount of excel spreadsheets can lead to many errors that you may not discover for weeks.  Incomplete or disorganised records can lead to to incorrect employee payments, which will require urgent attention.

Having a manual payroll system also increases your reliance on one person to handle all payroll tasks. It’s more difficult to fill in for the payroll manager when he or she is out of the office or leaves the organization if the payroll system isn’t well-organized and automated. It can also put you in jeopardy if you’re subjected to an audit or a procedure review.

3. Not reporting all forms of taxable employee compensation

Employee payroll duties mean more than calculating salary, overtime, bonuses etc. As well as reporting the more traditional forms of employee pay, you also need to report other forms of taxable compensation to HMRC, such as:

  • Stock options and other equity awards
  • Employee rewards such as gift cards or travel awards
  • Use of a company car

A small gift or award to an employee may not seem like compensation, but HMRC may view it as part of your payroll. Not reporting these other forms of compensation can result in tax filing penalties for your organisation and the affected employees. 

4. Not tracking employee hours and overtime

Incorrectly logged overtime hours might result in incorrect overtime payments, requiring corrections that may span across multiple tax years. Correcting errors takes time and can be stressful for employees, especially if they are underpaid or overpaid.  This means they must repay money to the company which can be frustrating and put them in a difficult financial situation.

Overtime payment errors can occur if you miss a payment in any of the following scenarios:

  • When employees work during break times
  • When employees spend time travelling between work locations
  • When employees are required to participate in activities outside of normal hours, for example, training, team building, or company parties

5. Misclassifying employees

Employee misclassification is a judgment made by government regulators (such as tax authorities) that individual workers have not been categorised correctly under the law. It normally occurs where workers have been engaged either under a ‘contract for service’ or where there is no explicit contract in place. These workers might be referred to as ‘freelancers‘ or ‘independent contractors’, rather than employees.  IR35 was introduced by the government to prevent this from happening. If caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed.

The risks of employee misclassification include:

  • Substantial Back-Taxes
  • Financial Penalties
  • Legal Action from Employees

The simple solution to mitigating payroll mistakes is to outsource to an organisation such as Backoffice Nationwide.  We are here to make sure that these mistakes never happen, taking the pressure off HR staff and employees.  Get in touch with us here for all your payroll needs!