5 Most Costly Payroll Mistakes? (and How to Avoid Them)

From missing tax deadlines to overlooking benefit deductions, here are five of the most common payroll blunders that can cost businesses big, along with practical solutions to keep your payroll running smoothly.

Mistake #1: Misclassifying Employees

Why It Happens:
Confusion between employee classifications (e.g., full-time vs. contractor) can lead to payroll errors. For example, independent contractors aren’t eligible for benefits and have different tax obligations compared to employees. This is a common issue for businesses that rely on freelance or gig workers.

Real-World Example:
A marketing firm mistakenly classified a group of remote freelancers as contractors. When the IRS audited the company, they had to pay back taxes, penalties, and compensate employees for unpaid benefits.

Solution:

• Review IRS guidelines for worker classifications. The “employee vs. contractor” decision hinges on factors like control over work schedules and company-provided resources.
• Use payroll software that handles classification requirements and auto-calculates payments accordingly.
• Consider consulting a legal or HR professional to routinely audit classifications.

Mistake #2: Missing Tax Deadlines

Why It Happens:
Withholding the correct amount is just one piece of the puzzle. Forgetting to deposit payroll taxes on time or file quarterly/yearly forms can trigger expensive penalties.

Real-World Example:
A small café owner intended to file payroll taxes quarterly but got sidetracked by the busy holiday season. Late filings and missed deposits led to hefty interest fees.

Solution:

• Use payroll systems with built-in tax alerts to remind you of filing deadlines.
• Outsource payroll management to APlus Payroll
• Create a payroll calendar to keep track of all deadlines and share it with your team.

Mistake #3: Incorrect Overtime Calculations

Why It Happens:
Payroll teams can miscalculate overtime pay, especially if employees juggle multiple pay rates or shifts. This error is often magnified when companies don’t have clear policies or use manual time-tracking.

Real-World Example:
A warehouse worker noticed discrepancies in their paycheck after working multiple overtime hours during a peak season. Filing a complaint led to an audit and back pay for all affected employees, costing the company thousands.

Solution:

• Implement time-tracking tools
• Check your state’s overtime laws; some regions have stricter rules than federal guidelines.
• Audit paychecks regularly and involve your payroll team in training sessions on overtime policies.

Mistake #4: Neglecting to Keep Accurate Records

Why It Happens:
Small businesses often overlook documentation requirements or simply don’t have an organized system to store payroll data. Poor record-keeping can result in compliance violations during audits.

Real-World Example:
An e-commerce company lost track of payroll dispute records, making it impossible to defend themselves during a Department of Labor review. Missing documents resulted in extended penalties.

Solution:

• Maintain clear records of pay stubs, tax forms, benefits, and employee hours for at least 3-7 years (based on federal and state requirements).
• Digitize records using cloud-based systems like APlus’s to ensure data is secure and easily accessible.
• Conduct annual payroll audits to ensure records are complete and error-free.

Mistake #5: Overlooking Benefit Deductions

Why It Happens:
It’s easy to make errors when deducting benefits like health insurance, retirement contributions, or commuter plans. Miscalculations can frustrate employees who rely on payroll accuracy to manage their budgets.

Real-World Example:
A boutique business offered a new retirement plan but forgot to adjust payroll systems for certain employee contributions, leaving affected employees short on their 401(k) deposits.

Solution:

• Automate benefit deductions by integrating payroll software with benefits providers like APlus
• Communicate changes in deductions clearly to employees, ensuring transparency.
• Double-check pay stubs during open enrollment periods to confirm accuracy.

How to Avoid Payroll Pitfalls

To summarize, here’s a quick Payroll Management Checklist that can help you stay organized and compliant:

1. Classify Employees Correctly: Consult IRS and legal guidelines to avoid missteps.
2. Mark Tax Deadlines on Your Calendar: Automate filings and reminders for peace of mind.
3. Track Time Effectively: Use reliable tracking tools to calculate overtime and hours worked.
4. Keep Accurate Records: Digitize and organize your payroll files for long-term use.
5. Review Benefits Deductions Regularly: Ensure deductions align with plans and agreements.

Of course we’d love you to use APlus Payroll to help navigate you through the many minefields of Payroll compliance, but if you’re not quite ready to make that step just yet, we hope this tips will help you out.

This blog does not constitute formal Payroll, HR or legal advice and does not address state or local laws. Our HR Resource Center by Mineral offers further guidelines for this and many other topics. For a small additional fee you can also speak to a live HR Specialist. Contact your friendly APlus Payroll CSS for further information (including login details) or login here. Want to know how we can help your Payroll or Time & Labor process? Please contact us here. Consultation is friendly and free!