Whether you calculate your business’s payroll by hand or with the assistance of payroll software, errors are always a threat. While one error is forgivable, more than one becomes a hassle for both you and your employees.
The first and foremost way to avoid payroll errors is to invest in time and attendance software. With hours, sick days, and time off logged in a program – preferably in the cloud – you can avoid any questions when errors do arise. However, once that is done, you’ll still want to follow these five tips to help prevent your business from making some of the most frequent and basic types of payroll errors.
Put a Pay Policy in Writing
One of the easiest ways to avoid payroll mistakes is to write out a pay policy and make it available to your employees. Be sure it includes:
- What parameters pay is based on, what factors go into determining a pay raise, and when pay raises take effect within the payroll system.
- How your employees can log onto the attendance system online to check hours and fix errors.
- How your company deals with payroll mistakes, such as under- or over-payment and what the employee’s responsibilities are in those instances.
Having a policy in place keeps your payroll procedures transparent for you and your employees. Fewer mistakes are made when everyone knows what the policies are towards raises, errors, and other situations.
Classify Employees Correctly
Employees are classified in various different ways, from exempt to nonexempt to contract workers. According to The 8 Biggest Payroll Bloopers, “Classification is important in determining a worker’s entitlement to benefits including health insurance and a retirement plan … as well as determining if the worker is subject to federal income tax or employment tax withholding.” The Fair Labor Standards Act lays out specific guidelines for how to classify employees correctly.
- If you classify your employees incorrectly, you may end up paying too much in taxes, be held responsible for back taxes, find yourself on the receiving end of a lawsuit, or end up subject to Federal or state employment audits.
- Don’t give in to the temptation to classify all your employees as contract workers. If their work schedule and pay is comparable to that of a permanent employee, they probably don’t qualify as a contract worker under Federal law.
Prepare the Right Forms
During tax season, make sure that you’re preparing and sending out all of the correct forms required at the Federal, state, and local level. If your employees work in multiple states or localities, you may have additional forms to file.
- Don’t forget to send out 1099 forms to your contract workers – and be aware of any changes in the law regarding independent contractors.
- Sending in forms late or excluding necessary forms can result in penalties and late fees, so be sure you’re on top of your paperwork.
Keep Up on Payroll Regulations
Payroll is subject to numerous Federal and state payroll laws that affect your business not only during tax season, but throughout the year. Laws and regulations change from year to year, so make sure that your knowledge is up-to-date. Pay particular attention to regulations concerning:
- Withholding income tax at the correct rate.
- Paying state unemployment taxes.
- Child support withholding.
- Calculating and properly taxing fringe benefits.
Audit Your Payroll Software
Using payroll software in your business can drastically cut down on the amount of work you have to do to complete your payroll and taxes correctly. However, no program is perfect – and if errors show up in your taxes or employee paychecks, you are the one who will be held responsible.
- Most payroll software automatically updates each year with the most current regulations and tax tables. Download the newest tax tables from the IRS website yourself to make sure your software has been correctly updated.
Payroll errors can occur any time throughout the year. You may overpay an employee due to a math error, incorrectly classify a new employee’s tax status, or fail to increase the pay rate of an employee who was promised a raise. Even if you have payroll software, you should double-check that all your payroll paperwork is in order so as to prevent errors this year.
Megan Webb-Morgan is a web content writer for B2B lead generation resource, ResourceNation. She writes about small business, focusing on topics such as business sales. Follow Resource Nation on Facebook and Google+, too!