10 Common Payroll Mistakes Errors And How To Avoid Them

An unsatisfied employee will constantly wonder whether or not their paycheck will be on time or even in the correct amount. The IRS expects your business to file payroll taxes promptly and accurately. If you don’t report on time by filing the correct form, you could incur a financial penalty. Imagine that you’re running your company’s payroll when you notice that a few employees seem to have much smaller paychecks than usual.

W-4 setup error

Here’s a breakdown of some of these common errors, including ways to resolve them and, more importantly, prevent them. Mark your calendar for the pay dates and distribute the checks on the pay date. Make plans to distribute checks for pay dates you will be out of the office.

If you don’t have the relevant expertise or experience, your company might misinterpret or be unaware of local tax laws and employment regulations in your employee’s country. This can result in non-compliance penalties and incorrect tax withholdings or filings. When you incorrectly classify a nonexempt worker as exempt, the worker misses out on overtime wages.

One financially egregious mishap, unentered sick time, reaches $705 — more than twice that of the average payroll issue. And if it happens for one employee, it’s not a stretch to assume an issue that severe shows up again in a broken payroll process. Now that you understand how to prevent payroll mistakes, the next step is learning about employee classification with our guide on exempt vs. nonexempt employees. It’s also important to note that tax rates and rules can change annually, sometimes mid-year, requiring constant vigilance. For companies expanding into new states or localities, it’s crucial to research and plan for new tax obligations well in advance of hiring employees in those areas. Additionally, it is important to have a system in place for organizing and storing records so that they can be easily accessed when needed.

1. These fines cost an average of $5,200, with the largest fine reported as $100,000.
2. Some cities and counties impose their own income taxes, which must be withheld and remitted separately from state taxes.
3. Failure to pay overtime wages to employees who earn them may result in penalties and interest.
4. After a year of processing payments and taxes, organizations must send employees all the necessary tax forms.

Best HR Practices for Remote Work in 2025

An enterprise with 5,000 workers would waste over $4.5 million a year to lost productivity. It’s no wonder 91% of HR professionals told OnePoll reporting and analyzing current liabilities in a study commissioned by Paycom that payroll mistakes break trust between employees and employers. With overtime, commissions, deductions, PTO, and more, payroll administrators have a lot to keep track of when calculating pay.

Overpaying or underpaying employees

Payroll is complex and one of the most regulated functions in an organization. Navigating federal, state, and local jurisdiction requirements can be daunting for employers. With a robust, full-service payroll software solution in place, accountants can strengthen their role as a trusted advisor and turn payroll into a profit center. Learn more with a free, cloud-based trial of Accounting CS Payroll. In a payroll program, an employer must follow the payroll laws of the state they inhabit.

Additionally, companies need to decide how to handle unused PTO – whether to allow carryover, implement a “use it or lose it” policy, or pay out unused time. To learn more about our payroll options — and to find the best one for your business — book a demo with one of our friendly experts today. In several of these scenarios, we’ve mentioned that you should communicate the errors to your employees. If you have employees abroad, you have several payroll options. You can conduct regular audits of your benefit deductions to help you identify and rectify errors promptly. Increase profits, strengthen existing client relationships, and attract new clients with our trusted payroll solutions that accommodate in-house, outsourced, or hybrid models.

Not only can misclassification deny an employee important benefits and wages, it may also mean the government misses out on valuable tax dollars. These fines cost an average of $5,200, with the largest fine reported as $100,000. Mistakes happen and, unfortunately, this means that payroll errors are fairly commonplace. One study by the Internal Revenue Service (IRS) found that 33 percent of employers make payroll errors each year, resulting in costly amendments and penalties. Besides a regular paycheck, the W-2 is the only payroll document employees receive from your company.