Preventing Payroll Gaffes

Payroll mistakes are costly — in time, money and employee trust. Understanding the following most likely errors is the first step toward preventing them:

Misclassifying employees. This can lead to over- or underpayment of both wages and overtime. Classifying a nonexempt employee as exempt can also expose your company to Fair Labor Standards Act-related fines.
Miscalculating pay. Inaccurate paychecks require time to correct errors. Additionally, under- or overpayment can lead to employee resentment.
Keeping incomplete records. The FLSA requires employers to maintain accurate records of hours worked, wages paid and other key data.
Overlooking payroll deductions. Wage garnishments and taxable compensation such as bonuses, commissions, stock options, gift cards and personal use of company cars must be correctly deducted from earnings.
Missing tax deadlines. Late filings and missed payments can result in IRS penalties.
Providing employees with incorrect W-2s.

One person handing a blank check to another person

Where payroll processes can break down

Many payroll errors stem from weak processes. Key risks include:

No clear assignment of responsibility for monitoring payroll compliance
Unclear procedures for making and documenting payroll tax payments
Inadequate onboarding and offboarding procedures
Poor controls to ensure pay is recorded in the correct period

Begin by carefully reviewing your payroll procedures. Who is in charge? How are they trained? What plans are in place to ensure they receive updated training as laws and regulations evolve?

Next, document all procedures in writing and set a schedule for regular reviews and updates. Make this review part of your payroll department's deliverables.

Establish compliant employee education and orientation/departure procedures, ensuring that every step — such as correctly completing W-4 forms — is followed precisely.

Regularly recompute salary accruals, compare payroll expenses against expectations and verify fraud-related controls. Review W-2 forms to confirm they accurately reflect gross and taxable income, benefit deductions and other withholdings.

Organized and documented processes facilitate smoother daily operations and allow someone to step in if the payroll manager is absent or leaves the company. This reduces the risk of issues during audits.

Even with well-documented processes, it's essential to remain vigilant for other risks that may lead to mistakes or noncompliance. These include:

A single person performing multiple payroll tasks without independent review
Recorded time not being reviewed and approved
Missing procedures for adding or removing employees from the payroll

Correcting payroll mistakes

If a mistake occurs, act swiftly; how you respond matters. Communicate payroll errors promptly to affected employees, balancing transparency with reassurance. Offer a sincere apology and explain the steps being taken to rectify the mistake. Then, prevent future errors by investigating the causes of the mistake. Use Form 941-X to notify the IRS of any payroll tax corrections.

Employees expect accurate pay. Meet and exceed their expectations by creating clear, well-documented payroll processes, including a manual that outlines all payroll activities and procedures for reviewing and approving changes. Transparent recordkeeping and retention policies help build employee trust and support compliance.

Handled thoughtfully, even a payroll mistake can become an opportunity to build trust and reinforce your team's confidence in your leadership.