According to the Internal Revenue Service, 40% of small to mid-sized companies have to pay penalties each year for payroll filing mistakes. Those mistakes can be very costly; not just in monetary terms. Payroll errors can also create a lack of trust between your firm and your employees. In turn, that can damage your business’s reputation. So, it is vital employers file payroll correctly.
Here are some of the most common ways in which you can get into trouble with payroll errors. If you do any of the following, you could face hefty penalties and interest.
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Miscalculations Due to Manual Input
If you are still doing your payroll in the old-fashioned manual way, you are setting yourself up for making more mistakes. Miscalculations can easily happen when filing employees’ payroll and taxes manually, so it is about time you invested in some modern software that can do the calculations for you. In addition, use an online pay stub generator that includes helpful autocomplete and calculation features for earnings and tax deductions to ensure employees’ payroll and taxes are calculated accurately.
Employers can quickly get into trouble when they estimate the hours worked by employees a day or two before the closing date for payroll. That is because the actual time employees have worked may not be reflected in the estimate you provide. Whether you underpay or overpay an employee due to estimating, it means trouble. From the employee’s point of view, he or she will want to be paid for the hours they have completed and not have to wait for the next payday to receive the payments owed. But estimating payroll also causes you problems because your records will be inaccurate. That can lead to investigations from the Department of Labor and can result in large penalty fines. So, never estimate employee wages.
Miscalculating or Not Paying Overtime
Too often, employers miscalculate overtime. The FLSA says overtime has to be paid at a rate of 1.5 times the rate of regular wages, meaning if an employee usually works for $10 an hour, his or her overtime pay will be $15 an hour. Overtime must be paid for any work employees do over forty hours per week. If you miscalculate overtime pay or simply forget to include it in an employee’s wages, you will end up with inaccurate records. You could also have to pay a $1,000 civil penalty fee as well as the overtime wages owed.
Not Checking Time Cards for Errors
Completing payroll for each pay period can be a rushed and stressful activity, but employers who rush their payroll processes can easily neglect important things, such as not checking time cards for errors. Having timesheets with incorrect information is one of the most common payroll mistakes employers face. It is an employer’s responsibility to ensure all employees are paid correctly, and that can be assured when employers always check employee time cards for potential errors.
As every business owner knows, employees and contractors are not the same. As an employer, you are not legally obliged to pay contractors the minimum wage and you do not have to withhold taxes. If you misclassify a contractor as an employee or vice versa, the person could be overpaid or underpaid and have the wrong amount of tax indicated on his or her pay stub. If you confuse employees and contractors during the payroll process, it is bad news for the worker, but it is also bad news for you because you could have to pay penalties and interest.