When it comes to payroll, the stakes are always high. Get it right, and nobody notices. Get it wrong, even by a few cents, and you’re in the middle of an emergency.
Common payroll errors can lower morale, damage employee trust, and lead to costly fines from the IRS and Department of Labor. In a matter of minutes, payroll issues can go from being a financial problem to a people problem—and even a compliance problem. This article breaks down the most common payroll mistakes, giving HR a practical to-do list for how to fix payroll errors and prevent them for good.
Common Payroll Mistakes
If you’re tired of dealing with payroll errors, you’re not alone. According to one study by the IRS, 33% of employers make payroll mistakes each year (Thomson Reuters). These are some of the most common ones:
1. Miscalculating Exempt vs. Non-Exempt Employees
This is a high-stakes error. HR should follow strict guidelines from the Fair Labor Standards Act (FLSA) to determine who gets overtime pay. Otherwise, it’s all too easy to classify an employee as exempt (salaried) when they should be non-exempt (paid hourly).
If you fail to provide adequate overtime pay, you risk being sued by current or former employees claiming they didn’t receive proper compensation.
How to Fix this Mistake
Audit your job descriptions against the FLSA’s duties tests. A title (like “manager”) doesn’t make someone exempt; their actual job duties do. When in doubt, it’s safer to classify an employee as non-exempt.
2. Incorrect Overtime Calculations
Even if you classify employees correctly, you can still miscalculate their overtime pay. If you’re using disparate systems to track scheduling and payroll, the risk of miscalculations is extremely high. Simple data entry mistakes can lead to an employee being over- or underpaid, which can break employee trust and leave you open to wage and hour lawsuits.
How to Fix this Mistake
Ditch the manual processes. Instead, use an automated time and attendance system that integrates directly with your payroll software. The best HCM solutions automate every step of the process to ensure all hours are tracked and payroll is calculated correctly.
3. Mishandling Garnishments and Deductions
From health insurance and 401(k) contributions to court-ordered child support or tax levies, the list of deductions is long. HR professionals can easily forget to update a contribution amount or fail to process a new garnishment order.
If this process is mishandled, it could mean legal trouble for your company and your employee.
How to Fix this Mistake
To guard against this problem, update your workflow. A clear, centralized payroll system makes it much easier to handle deductions. The best solution is a unified HCM software that connects the dots between benefits administration and payroll.
Costly Payroll Mistakes
Many payroll errors are expensive and time-consuming. These are some of the most costly payroll mistakes:
4. Misclassifying Employees vs. Independent Contractors
In the gig economy, it’s increasingly common to use temps, freelancers, and consultants. But if you classify a full-time employee as an independent contractor to avoid the cost of benefits and employer payroll taxes, you could be in hot water.
The IRS and Department of Labor are cracking down on this. Misclassification can result in major penalties, back taxes, and lawsuits for unpaid overtime and benefits.
How to Fix this Mistake
Regularly audit your worker relationships to clarify whether they’re performing the duties of employees or true independent contractors. For an official determination, you can file Form SS-8 with the IRS.
5. Missing or Mismatched Payroll Tax Payments
Payroll tax is one of the most regulated aspects of business management. Your company is responsible for meeting all federal, state, and local tax requirements. That includes withholding the correct amounts and depositing those funds on time. If you don’t file your payroll taxes on time, you could be fined a percentage of your deposit based on how late it is, with penalties ranging from 2% to 15% or more.
How to Fix this Mistake
Ensure your budget accounts for tax payments. If possible, work with a dedicated team of tax experts to ensure you’re tracking all the relevant details. Some payroll providers will connect you with tax specialists as an added professional service.
6. Disregarding Pay Equity
The Equal Pay Act (EPA) and Title VII mandate that men and women in the same workplace receive equal pay for equal work. The jobs don’t have to be identical, but they must be “significantly similar.”
These laws cover salary, overtime, benefits, and bonuses. If wage inequality is discovered in any of these areas, you can’t reduce the wages of either party to equalize pay. This mistake can lead to major lawsuits and legal fees, while also damaging your employer brand.
How to Fix this Mistake
Analyze your pay structure by averaging pay for all employees based on their job descriptions. Compare the stats and look for discrepancies that cannot be explained by legally acceptable factors like seniority, experience, or education. Modern HR technology can help you follow pay equity laws and spot any gaps.
7. Ignoring Workers’ Compensation Insurance
Workers’ compensation insurance (or workers’ comp) provides benefits to employees when they’re injured on the job. While every state has its own program, this benefit is mandatory throughout the U.S.
Employers who fail to provide workers’ comp may face stiff penalties and even criminal charges. This insurance protects team members (including HR leaders and C-suite executives) from being held personally liable for an accident. Without it, you could be responsible for all medical bills and lost wages.
How to Fix this Mistake
Make sure you have an active workers’ comp policy that follows all relevant state and federal laws. You should also implement an Injury and Illness Prevention Program (IIPP) by auditing your practices and assessing work conditions to identify safety red flags.
Time-Consuming Payroll Mistakes
These payroll problems might not land you in court, but they drain your team’s most valuable resource: time. If left unchecked, they can also trap your HR department in a reactive cycle.
8. Manual Data Entry Errors
If you’re still typing up data from paper timesheets or manually entering new hires, you’re guaranteed to make mistakes. But these tiny typos can become major payroll errors that eventually cost your business millions.
How to Fix this Mistake
Invest in payroll software that eliminates manual data entry. Look for a unified platform that connects all your employee data, including compensation details, timekeeping, benefits, and so on. When everything syncs automatically, there’s no room for typos or transcription errors. Your team can spend their time on strategic work instead of hunting down mistakes.
9. Using Disconnected Systems
Your timekeeping is in one system. Your HR is in another. Your benefits are in a third. And your payroll is in a fourth. How much time does your team spend reconciling data between various apps? It’s inefficient, frustrating, and a recipe for human error.
How to Fix this Mistake
Choose an integrated HCM platform where payroll, timekeeping, HR, and benefits all live in one place. When your systems talk to each other, data flows seamlessly without manual intervention. Your team stops wasting hours on reconciliation, and employees get paid accurately every time. It’s a simple fix that saves thousands of hours per year.
10. Chasing Down Manager Approvals
It’s two days before payday, and you’re still sending “friendly reminders” to managers, asking them to approve employee timecards. But they’re swamped already, and they keep putting it off. When they finally do respond, your HR team has to rush. As a result, they make several careless mistakes, and employees get paid late or inaccurately. Sound familiar?
How to Fix this Mistake
Set up automated approval workflows that route timecards to managers well before payroll deadlines. Send reminder notifications at strategic intervals, and escalate unreviewed timecards to department heads when necessary. The right system removes the burden from HR and puts accountability where it belongs: with the people who actually manage the work. Your payroll team can process payments on time, every time, without chasing anyone down.
Additional Payroll Issues to Avoid
Here are a few other common payroll issues to look out for:
- Not Maintaining Security & Confidentiality: Your payroll database contains a huge amount of personal, sensitive information. Make sure to store it in a secure environment with limited access, strong passwords, and encrypted data to protect it from hackers.
- Poor Record-Keeping: In most companies, HR needs to store all payroll records (like time sheets and W-4s) for at least four to six years. The rules vary depending on your location and the form in question.
- Failing to Send 1099s: If you pay an independent contractor $600 or more during the calendar year, you must send them a completed Form 1099 by January 31st of the following year.
- Ignoring Final Paycheck Laws: When an employee leaves, many states have specific laws governing when and how the company provides their final paycheck.
How to Fix Payroll Mistakes
So, you found a mistake. Don’t panic. Here’s a general process for correcting almost all payroll errors:
Acknowledge the Issue
80% of known payroll errors are first discovered by employees (G2).When an employee reports an, HR should respond immediately. Thank them for pointing it out and let them know you’re taking it seriously. This builds trust and shows you respect their concerns.
Investigate the Report
Next, verify the employee’s claim. If you agree with their assessment, identify the source of the problem. Was it a simple typo? A manager’s missed timecard approval? A bad formula? When you understand the cause, you can prevent the error from happening again.
Communicate Transparently
Tell the employee what happened and how you plan to fix it. Use simple terms (no HR jargon) and omit any details that would breach confidentiality.
Process the Payroll Correction
At this point, you have a few options. You can process payroll off-cycle to pay them immediately, or you can add the correction to their next paycheck. If it was an overpayment, work with the employee on a repayment plan.
Note: You should always check state laws before deciding how to process payroll corrections.
Fix the Root Cause
This is the most important step. Now that you’ve investigated the source, fix the underlying process so the mistake won’t happen again.
Adjust Tax Filings
If the payroll mistake affects tax withholdings, you may need to file a correction with the IRS using Form 941-X. In these situations, having a payroll provider is a huge help.
How to Avoid Payroll Mistakes, Errors, and Discrepancies
If you’re tired of fixing payroll mistakes, you can take certain steps to avoid them in the first place. Follow these best practices to avoid the most common payroll errors:
- Create a Master Checklist: Document every step of your payroll process. Turn it into a repeatable to-do list that you follow every single pay cycle. This helps your team remember every step, even if they’re rushing to meet a deadline.
- Set Calendar Reminders: When you miss key tax filing deadlines, you’ll face expensive fines and interest charges. Set reminders or refer to a payroll calendar.
- Conduct Regular Audits: Set a cadence to perform internal payroll audits; this could be quarterly, biannually, or annually. Go through your employee database to make sure everyone is appropriately classified. Spot-check a few employees’ paychecks by hand to make sure your system calculations are correct.
- Automate and Unify Your Systems: When you’re running manual payroll, mistakes are inevitable. The only way to effectively avoid major challenges is to use a single, unified HCM platform. When your timekeeping, HR, benefits, and payroll are all in one system, the data flows automatically, ensuring payroll compliance.
How Paycor Helps You Avoid Payroll Issues
Paycor’s HR & Payroll software is a single, unified platform. This means your employee timecards, benefits deductions, and new hire data are all stored in one secure place. The data flows seamlessly to payroll, eliminating manual data entry to drastically reduce payroll errors. We regularly update our platform to follow the most updated payroll tax laws so you can focus on what matters most: supporting your people.
Partner with Paycor to Avoid Payroll Mistakes and Errors
Stop spending your time fixing costly payroll mistakes and start focusing on strategy. Paycor’s HR and Payroll Software gives you the tools to run an accurate, compliant, and efficient payroll every single time.
Ready to say goodbye to payroll mistakes? Schedule a guided tour.
Payroll Mistake FAQs
Learn more about payroll errors and discrepancies here.
Who is responsible for fixing payroll errors?
The employer is responsible for fixing payroll errors. Even if you use a third-party payroll provider, your company is legally responsible for paying employees correctly and filing all taxes on time. While your payroll manager may be the person to process the correction, the legal and financial responsibility rests with the company.
How much money do companies lose because of payroll mistakes?
Payroll errors add up fast. According to one study, every payroll mistake costs an average of $291.00 (HRDive). If your team is making frequent mistakes, or if you work for a large company where one error can impact hundreds of employees, the problem can quickly become unmanageable.
How much time is lost due to payroll mistakes?
Payroll is one of the most time-consuming parts of HR, even when it goes perfectly. Small errors can take minutes or hours to fix, while major problems can snowball into lengthy legal battles.
How long does a company have to correct a payroll mistake?
In short: as soon as possible. The exact grace period depends on several details, including the type of error and your company’s location. Some U.S. states have specific laws requiring payment within a certain number of days. The longer you wait, the greater the risk of legal action.