Payroll

What Are the Top Payroll Errors?

Nicole Sithithavorn Blog Payroll, Small Business

Your employees expect their paychecks to be accurate and on time — and rightfully so. A single missed or delayed check can impact 86% of American workers financially. Beyond the dollars, it erodes trust between your company and your team.

Catch errors early before they cause damage

One of the most effective ways to reduce payroll mistakes is to catch them before payroll runs. When employees have visibility into their pay ahead of time, they can spot discrepancies — this ability improves both financial security and job satisfaction.

Creating an employee-guided payroll system empowers your team to flag issues proactively. The alternative? Letting errors go unchecked, which can damage morale, lead to compliance issues and cost your company both time and money.

What payroll mistakes really cost you

Mistakes in payroll aren’t just minor hiccups — they hit your return on investment and productivity in big ways:

Direct costs: Voids, reversals, paper checks and wire fees add up.
Indirect costs: Human resources and payroll teams spend valuable time correcting errors instead of focusing on strategy.
Legal and compliance risks: Penalties for noncompliance can be steep.

Common payroll pitfalls and how to fix them

Let’s look at some of the most common payroll errors and how to proactively prevent them.

Missing or incorrect time punches

The problem: Without a solid timekeeping process, error rates can climb as high as 20%.

The solution: Use reliable time-tracking software and allow employees to verify their hours before payroll runs.

Unreimbursed expenses

The problem: Business trips, client meals and work-related expenses can easily be left out.

The solution: Ensure expense reports are submitted and processed before payroll deadlines.

Paid time off and sick time issues

The problem: Faulty accruals, untracked sick time or incorrect PTO balances are more than annoying — they can trigger disputes.

The solution: Use payroll software that accurately tracks and calculates PTO. Review it regularly and resolve discrepancies early.

Overtime miscalculations

The problem: Getting overtime wrong can result in underpayment and compliance issues.

The solution: Stay updated on labor laws and use tools that automate calculations based on those rules.

Errors in benefits and tax withholding

The problem: Mistakes in benefits-related deductions or tax setup (such as W-4 errors) can have ripple effects.

The solution: Ensure benefit information is updated regularly and tax rules are followed precisely.

Missed new hires or visa updates

The problem: Failing to pay a new employee on time or mishandling a visa update can result in legal trouble and lost trust.

The solution: Have a checklist for onboarding that includes payroll enrollment and verification of employment status.

Don’t overlook recordkeeping

Accurate records are a safety net. You’ll need them in case of an audit, disputes or legal questions.

Maintain pay stubs, time sheets, benefit records and tax filings.

The Fair Labor Standards Act requires payroll records to be kept for at least three years.

Some states have additional requirements — stay informed.

Payroll mistakes waste time — a lot of it

Payroll errors cost companies the equivalent of 29 full-time workweeks per year. That’s time spent fixing issues that could have been avoided with the right systems and processes. For example:

Reimbursing missed expenses: hours
Fixing health savings miscalculations: up to 130 hours
Correcting uniform charge issues: 188 hours

That’s not just inefficient — it’s expensive.

Mistakes can lead to legal trouble

Beyond administrative hassle, payroll errors open the door to litigation. Think unpaid IRS taxes, incorrect W-2s, misclassified employees. The financial fallout could include:

Legal fees
Settlements
Regulatory fines
Damaged employee trust
Even layoffs, if the impact is severe enough

Final thoughts

Payroll accuracy isn’t just a finance issue — it’s a process issue. Your payroll process should be reliable, efficient and built to catch errors before they snowball.

By investing in the right tools and systems, you save time, reduce risk and build trust with your workforce. Get payroll right and everything else will run a little smoother.

Payroll and Taxes: A Quick Review

admin Blog Compliance, Payroll, Tax

So that you withhold the correct amount, each employee must complete and then share with you IRS Form W-4, Employee’s Withholding Certificate. You can suggest that, to find the best amount to ask you to withhold, they use the Tax Withholding Estimator tool. You can find the appropriate method for withholding and a withholding table described in Publication 15-T, Federal Income Tax Withholding Methods, at irs.gov.

You also must withhold Social Security and Medicare taxes and pay the employer’s share of those taxes.

Social Security and Medicare have different rates, and Social Security tax has a wage base limit, which is the maximum wage subject to the tax for the year. Publication 15, Circular E, Employer’s Tax Guide, has the current year’s Social Security and Medicare tax rates as well as the Social Security wage base limit.
Determine the amount of withholding for Social Security and Medicare taxes by multiplying each payment by the employee tax rate.
You’re also responsible for an Additional Medicare Tax of 0.9% on any employee’s wages and compensation that exceeds $200,000 in a calendar year. Publication 15 includes questions and answers regarding the Additional Medicare Tax. There’s no employer match for this tax.

A third obligation is to report and pay federal unemployment tax, which is done separately from federal income tax and Social Security and Medicare taxes. Employers pay federal unemployment taxes themselves; they cannot be paid by employees or withheld from their pay.

Don’t forget to file

Finally, you must report and deposit these taxes. This is done by preparing and filing the following IRS forms:

Form W-2, Wage and Tax Statement, to report wages, tips and other noncash payments to employees at your business. Copies of this form are filed with the government and distributed to your employees to use for their tax returns.
Form W-3, Transmittal of Wage and Tax Statements, is a summary of all your W-2s and is used to transmit the information to the Social Security Administration.

If you use the Electronic Federal Tax Payment System to file taxes with the IRS, it’s free. Other methods — such as Automated Clearing House, a third-party transfer from your tax professional or payroll service, or a same-day wire transfer from your financial institution — may come with fees.

Employers with employees do not need to be concerned with self-employment tax, which is primarily for individuals who work for themselves. It’s equivalent to Social Security and Medicare taxes that get withheld by employers, but independent contractors have to pay those taxes themselves.

Creating a Payroll Continuity Plan

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No matter what crisis your business may face — infrastructure collapse, regional power outage, bomb threat, pandemic, flood — your employees are entitled to any wages or salaries owed to them. It’s important to have a plan that allows you to make payroll during a crisis, thereby meeting your legal obligations to ensure workers receive their pay on time.

Employers are not allowed to pay employees less frequently than the state-mandated time frame (weekly, biweekly, bimonthly, etc.). Employers are also obligated to perform all other legally required payroll duties, including remitting and reporting payroll taxes, unless the government declares otherwise. However, the U.S. Department of Labor, which oversees the Fair Labor Standards Act, has noted that minimum wage and overtime pay requirements aren’t subject to waiver during natural disasters and recovery efforts.

In the event of an emergency, you will need a payroll continuity plan. A singular plan is not as good as one that covers a variety of scenarios and timelines. Start by imagining all the possibilities, then create plans to respond to the variety of crises. Remember that in addition to payroll staff, vendors and service providers will need to know what steps to take to deliver payroll in a crisis. The plans should also dovetail with your IT department’s disaster recovery plan, and both departments should understand where they intersect. A further consideration is building redundancies into the system that will accommodate transfers of funds and allow for operations to resume off-site.

The last step to consider is the communications strategy. Who determines whether there’s a crisis? Who communicates with whom about which plan to enact? Who is the central point of contact?

Planning for the unexpected

Among the scenarios to consider are these:

What if you lose access to your paper check stock?
What if you lose access to electronic files and folders in the cloud?
What if you are not able to access your computers, the internet, your printers or scanners? What if they are destroyed?
What if you are not able to get to the physical office? Or what if only some personnel are able to be present?
What if you lose access to your payroll team or other key people in your payroll process?
What if the personnel who approve payments are not available?
What if your payroll provider (if you have one) is offline? How will you cover for them?

Payroll continuity involves conducting a payroll risk assessment and implementing disaster recovery mechanisms. Solutions include:

Create a list of payroll responsibilities so that you’ll know what to deal with first when disaster strikes.
Establish backup mechanisms for all payroll records, including those stored in the cloud.
Consider using web-based payroll solutions so that you can run payroll from anywhere.
Choose online time and attendance systems so that workers can clock in and out remotely.
If you use a manual system, be certain that there are backup copies of all files off-site. These will include paper timesheets, calculators, paper checks and hard copies of payroll registers to show employees’ previous wages and deductions.
Train replacement personnel who can fill in for payroll employees who can’t get to work.
Encourage a multitiered system whereby people can be paid by direct deposit, pay cards or paper checks.
Know whom you are obligated to pay, how much you must pay and for how long you must pay it.

Walk through your payroll continuity plan and update it in light of changing technology and business structures. While meeting payroll may not seem as significant as evacuation and data recovery, your employees may face real financial costs in a crisis. Disaster aid and insurance checks may arrive slowly. With payroll continuity, you can ensure that timely payment is still possible so that workers have one less thing to worry about.

Payroll Accounting: The Basics

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Payroll is an integral part of every business. The payroll accounting process involves paying wages, calculating hours, applying benefits, deducting taxes and collecting garnishments, all while staying in compliance with federal rules, state laws and local regulations.

The best thing you can do for your business is to create a payroll schedule. Not only will this ensure that you complete payroll-related tasks in a timely manner, but it can also help you decide what benefits to offer.

What type of documentation do you need in order to file payroll taxes?

In order to file payroll taxes, the federal government says you’ll need either an employer number or a federal tax identification number. On a state or local level, you’ll likely also need an identification number for your business.

Why is payroll accounting beneficial?

Payroll accounting makes it possible for you to stay on top of expenses, namely when it comes to paying employees. That way, you can understand the total value of your company’s labor-related business costs.

A payroll accounting process can help you assess the financial impact of the decisions you make for your business. For instance, payroll accounting measures allow you to understand whether you should hire more full-time employees, part-time staff, consultants or contractors. Likewise, payroll accounting processes are what make managing tax liability records that much easier.

The easiest way to document information pertaining to payroll accounting processes is to create financial journal entries. You can jot down information about benefits, payroll taxes and wage deductions among other payroll-related details. Just make sure you are as detailed as possible so that your entries reflect a clear depiction of your business’ payroll expenses.

What information should you include as part of your payroll accounting process?

You should include the following information:

Employee compensation
Taxes withheld for employees
Taxes withheld for employers
Pay withheld for benefits-related reasons
Tuition reimbursement, if applicable
Costs associated with employee benefits

The entire point of a payroll accounting process is to provide yourself with a documented record of all the tax and legal obligations pertaining to your business. From there, you can compare your payroll information to federal, state and local tax laws to ensure you’re in compliance, which will naturally eliminate the chances of tax-related penalties and audits. Plus, your employees will be able to monitor what portion of their paychecks is taken out for taxes.

When you can look at the costs associated with hiring and retaining employees, you’re more likely to properly assess the profitability of the business. A payroll accounting overview will also help you decide how much and how often to pay your employees based on factors like the number of hours worked, each person’s job title and the services rendered from employing them. Payroll accounting processes make onboarding a breeze too.

Similarly, payroll accounting practices involve calculating the payments associated with payroll, which your business must make. You have two options when it comes to these calculations: manual or automatic. If you opt for manual calculations, make sure you have a system in place to ensure no human mathematical errors seep through the cracks.

You’ll need to determine the gross pay for each of your employees for each pay period. If you have hourly employees, all you have to do is multiply the number of hours each employee works by the hourly rate that each employee earns. On the other hand, you can choose to pursue an automatic payroll system carried out by technology instead.

With an automatic payroll system, the gross pay and relevant withholdings for each employee will be calculated automatically. From there, the technology you utilize will output an overview of all payroll-related expenses on behalf of your business.

If you decide to use payroll software, look for options that offer a cloud-based portal. That way, your employees will be able to access the portal, resulting in full transparency of each employee’s benefits and salary.

This is an incredible option for those who want to ensure that no payroll-related errors arise, because the automated payroll option automatically tracks hours logged by employees. It will also calculate pay rates and indicate which deductions should be made.

What should be included in your chart of accounts?

Your chart of accounts should include the following information:

The salaries and compensation of your employees
The cost of health insurance as an employee benefit
The amount of money withheld from paychecks for federal and state taxes
The amount of money withheld for Social Security and Medicare
The amount of money spent on workers’ compensation cases

Now that you have paid all the taxes you owe on both a federal and a state level, make it a point to maintain an updated and accurate record of the taxes you paid. In other words, remember to take recordkeeping seriously. As a general rule of thumb, you should keep a copy of your employee tax records on file for four years at a minimum.

At the end of the day, a payroll accounting process tailored to your business means your team will always have access to an accurate overview of the cost of paying employees. The key to success is to establish a process from the very beginning and uphold it over time.

Employee Taxes: Your Responsibilities

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Employers generally must withhold income tax from employees’ wages. To figure out how much tax to withhold, you need to use the employee’s Form W-4, the appropriate method and the appropriate withholding table described in Publication 15-T, Federal Income Tax Withholding Methods. You’ll deposit your withholdings based on your business and the amount you withhold.

File returns four times a year, and at the end of the year, prepare and file Form W-2, Wage and Tax Statement, to report wages, tips and other compensation paid to employees. Each employee needs a copy. You will use Form W-3, Transmittal of Wage and Tax Statements, to transmit Form W-2 to the Social Security Administration.

Know the details

The situation can get complicated when both employee and employer have to contribute. For example, the current tax rate for Social Security is 6.2% for the company and 6.2% for the employee. For Medicare, the current rate is 1.45% for you and 1.45% for the employee. Also, an Additional Medicare Tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. You’ll withhold an Additional Medicare Tax of 0.9% for single filers who make more than $200,000, and for married couples filing jointly, the threshold is $250,000, but if filing separately, $125,000. You don’t have to match this additional portion.

Employers report and pay Federal Unemployment Tax Act tax separately from federal income tax and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Employees don’t pay this tax or have it withheld from their pay.

Mark your calendar with key dates. The IRS has an Employment Tax Due Dates page with information on what you need to do and when you need to do it. The matching share of the Social Security and Medicare payroll taxes is collected as the Federal Insurance Contributions Act taxes, and your part is considered a business expense, not a liability. Because it’s a business expense, it can be written off at tax time.

Don’t forget the states

This is just the beginning of an employer’s responsibilities. You are likely subject to state withholding rules as well. It’s essential that employers be on top of the general rules and any annual rate changes. Understanding these tax issues is important since you bear the responsibility of fulfilling your tax obligations related to your employees. It’s important to send out payments on time to avoid penalties and late fees. Be sure to work closely with financial professionals to make sure you stay compliant.