Top 10 Payroll Mistakes

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Published February 2009

Any business with employees must have a system in place for handling payroll activities, which includes paying employees, filing all necessary government forms, and promptly paying taxes. Here are 10 of the most common payroll mistakes to be aware of:

  1. Missing deadlines. It is imperative that you mark your payroll calendar and report and deposit and payroll taxes to federal and state agencies in a timely manner. Late deposits can result in penalties and interest charges.
  2. Misclassifying workers. Because of the growing number of temporary employees, consultants, and other independent contractors, it is essential that you properly determine the classification of everyone working for your company so you can determine how to report payroll information for tax purposes.
  3. Neglecting to send 1099s. All independent contractors who receive $600 or more in compensation during a given year are supposed to receive a 1099 form by January 31st of the following year. Often companies neglect to send these out in a timely fashion.
  4. Poor record keeping and data entry. Mismatching names and Social Security numbers is so common that the Social Security Administration has even established a special verification phone number. Numerous data entry mistakes, including poor records of employee hours, cost companies millions of dollars annually and can result in government penalties.
  5. Not properly handling garnishments, levies, or child support. Employees may owe money by way of a court order to other parties. This means whoever is handling payroll will be responsible for sending the payment to the appropriate recipient.
  6. Miscalculating overtime pay. There are guidelines that must be followed when determining overtime pay and miscalculations can be costly. Litigation has been increasing in recent years claiming that employees who were treated as “exempt” employees and therefore not entitled to overtime were misclassified.
  7. Leaving too much responsibility to the software program. There are several excellent programs available for doing payroll such as QuickBooks. However, the old garbage-in, garbage-out theory still applies. Too many people neglect to enter all of the data or assume that the program can perform calculations without all of the necessary information.
  8. Not saving payroll records. While states and specific agencies vary, typically records, including time sheets, cancelled checks, and W-4 forms, need to be held for anywhere from four to six years.
  9. Not maintaining confidentiality. Payroll information should not be disclosed to anyone outside of the payroll department or the senior management team. It is important that such confidentiality be maintained and that payroll is handled in a secure environment.
  10. Not having adequate backup. Should the individual responsible for payroll be away or sick, the IRS and the state still need to receive payments on time as do employees waiting for paychecks. There needs to be more than one person capable of both understanding and handling the payroll functions. In addition, if the computer is “down” for whatever reason, you need to have a manual backup system for handling all payroll functions.