How To Avoid And Fix The 5 Common Payroll Mistakes In 2023 (2023)


How To Avoid And Fix The 5 Common Payroll Mistakes In 2023 (1)

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How To Avoid And Fix The 5 Common Payroll Mistakes In 2023 (2)

  • Faizan
  • May 25, 2023
  • 5 min read

How To Avoid And Fix The 5 Common Payroll Mistakes In 2023 (3)

(Video) 10 Costly HR & Payroll Mistakes Many Restaurant Owners Don’t Realize Are Happening


The payroll process forms the basic mechanism by which a business compensates its employees for their work. The process requires a reliable method of calculation and delivery and compliance with all applicable local and national labour laws and collective agreements. However, being an extensive process, there are sometimes chances of errors that may hinder the overall process. Hence, it becomes extremely crucial for organisations to identify these payroll errors and fix them immediately. Let’s explore them!

5 Most Common Payroll Mistakes

  • Inappropriate Classification of Employees

Employee classification is used to identify employees eligible for company benefits. Misclassification of employees can lead to incorrect pay, resulting in ramifications for your business. Misclassifying employees is a common error when the payroll department cannot determine whether an employee should fall under the exempt or non-exempt employees category.

In terms of Indian employment law, all employees must receive overtime pay for any hours worked over 48 hours per week unless they are classified as exempt. Incorrect classification of a non-exempt employee as exempt not only opens your organisation to Indian labour law-related fines and statutory penalties but can also make an employee miss out on overtime earnings he is liable to receive. It might lead to employee dissatisfaction and low motivation.

Another common payroll mistake occurs when human resource management classifies an individual as an independent contractor rather than an employee for tax and legal purposes. In such cases, human resource management must review historic payroll records and make retrospective payments or adjustments to employee salaries. This misclassification harms employees’ morale and will likely cost your organisation unforeseen money.

  • Compensating the Wrong Amount

Receiving a miscalculated paycheck can be frustrating for any employee, particularly if the error causes a delay in payments. Miscalculations can result in wasted time – valuable time as the human resource management needs to dedicate hours and personnel to investigate and rectify these errors. In the meantime, employees tend to grow frustrated as they face trouble paying their bills due to delayed salaries. A recent EY-Refyne survey collected responses from 3,000 salaried Indians says that 80% of employees exhaust their salary before the month’s end.

Some of the common miscalculation scenarios include the following:

  • Overpaying or underpaying employees
  • Making erroneous retroactive payments
  • Missing the first paycheck for recruits
  • Incorrect deductions from the salary, such as professional tax, insurance, union dues, etc.
  • Not differentiating between authorised and unauthorised absence
  • Not verifying the deductions in the case of disabled employees or the ones under the exempt category
  • Miscalculating Employee Hours and Overtime

Employee working hours and overtime are the major components when calculating payments, especially for employees paid per working hour. Computing working hours and overtime may sometimes result in improper overtime payments. This, later on, can lead to several days of rectifications and calculations spanning multiple tax years.

Conversely, overpaying employees can lead to a lengthy rectification process. Correcting these errors takes time and can be extremely disturbing for employees, who must return the money received.

Paying overtime is not just about paying employees the standard 1.5 times their normal pay rate when they work over regular working hours. Misjudgement of working hours and overtime hours can arise if you miss a payment in any of the following cases:

  • When employees work during break times
  • When employees are working off-site or spend time travelling between work sites
  • When employees are engaged in activities outside of normal hours, for example, in training, team building, or corporate events
  • Payroll Tax Mistakes

Payroll tax mistakes are considered one of the most costly as they can attract heavy fines and penalties.

Some potential payroll tax mistakes are:

  • Late filing of taxes – The Indian income tax authority gives a due date for filing the taxes, and missing this deadline can attract a penalty and late fee.
  • Human errors – Incorrect figures/totals and improperly filling up the tax forms can lead to inaccurate remittance.
  • Incorrect tax – Paying the wrong tax rate requires calculating the difference in owed taxes later. You might also have to pay penalties or interest on the taxes.

Here are key payroll taxes you should be updated with:

  • Indian Income Tax
  • Social Securities
  • Employer and Employee Contribution
  • Incorrect Payroll Cycle Frequency

The payroll cycle refers to the period for which an employee is compensated. This can be weekly, monthly, etc. However, in India, the pay period is usually on the 30th or 31st of the month.

Not paying your employees on time can instigate them to file suit against you. Chronic procrastination in payment schedules might also affect employee satisfaction and lead to frustration.

An incorrect payroll frequency can also affect medical benefits and tax computation. Not getting payroll inputs on time and at fixed intervals can also defer various benefits.

For example, if an employee retires on the 15th of January and the payroll isn’t processed by the end of the month, their salary will be deferred for another month.

How to Fix These Payroll Errors

  • HR roles and responsibilities should set a regular payroll cycle frequency. Understand and implement Indian employment laws to ensure your state permits your organisation’s pay cycle.
  • Keep track of tax regulations and rates and deduct payroll taxes accordingly.
  • Submit the appropriate tax forms, such as Form 941 and forms for reporting Medicare tax, Social Security tax, etc.
  • Invest in the right tools and resources. Use automated payroll software for payroll processing and tax computation.
  • Keep your employee records updated. All the details regarding employment, such as name, age, employment type (permanent or contractual), etc., should be kept on records for proper classification. Accurate record-keeping ensures no mistake in the classification of employees, the computation of the minimum wages or overtime pay, etc.
  • Provide requisite forms to employees for fulfilling their tax obligations, such as Form 16.
  • Some labour laws and policies vary from state to state. Hence, human resource management should stay in the loop with applicable regulations for your organisation.
  • Promote open communication. Inform employees about the errors in their payslips and actions being taken to rectify them.
  • Run a payroll report before the final process to let the employees verify their payslips and inform them of any discrepancies.
  • Identify the error source and devise a solution to prevent any recurrence.
  • Human resource management must keep accurate and clean payroll records.

Navigating the complexities of payroll is of utmost importance to avoid any errors in your organisation’s functioning and maintain a smooth payroll process. While the payroll process might appear to be just another tedious HR activity, it affects many larger elements of the organisation, like employee satisfaction and company culture. Hence, investing in the right tool, such as a payroll management service provider, is always a good decision so your company doesn’t pay for the errors later.

Wrapping Up

Payroll mistakes are common but tedious to rectify. Countless issues appear while processing the payment – mostly when done manually. The problem amplifies when the payroll needs to be managed at a global level. To avoid the cumbersome job of payroll correction, you can always opt for an automated payroll management system software.

sumHRis a payroll service provider that helps you calculate and dispatch monthly payments smoothly. The all-in-one HRMS software streamlines all HR roles and responsibilities, such as payroll, performance appraisal, attendance, leave management, etc. Visit our website today!

Frequently Answered Questions

What is a pay stub?

A pay stub is a document providing details about a salaried employee's paycheck, including their gross wages, union dues, insurance deductions, taxes, and other payments. The pay stub also informs about the pay period, pay date, and pay frequency. Pay stubs are available in physical as well as digital forms.

What is off-cycle payroll?

Off-cycle payroll payments are payments made outside of the on-cycle payroll process. These payments are done to compensate employees who have been incorrectly paid on the previous regular payday. Payments, such as bonuses or reimbursements for expense claims, not included in the normal payroll, also come under "off-cycle" payments.

What are negative payroll situations?

Simply put, a negative payroll situation is when employee deductions exceed earnings. It is a common mistake when an employee's total gross earnings for a period is less than the total of all taxes and voluntary or involuntary employee deductions.

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How To Avoid And Fix The 5 Common Payroll Mistakes In 2023 (4)

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How do you overcome common payroll errors? ›

How to Fix Payroll Errors
  1. Cancel the payroll immediately, make updates, and reprocess it.
  2. Run an additional, manual payroll with the necessary adjustments for only the affected employees.
  3. Make adjustments on the next payroll to counteract previous mistakes and get things back in balance.
Oct 22, 2019

How can you avoid errors and improve payroll management? ›

How to avoid making payroll errors
  1. Conduct an audit. ...
  2. Improve communication. ...
  3. Check your data. ...
  4. Train your staff (or hire an expert) ...
  5. Eliminate human errors and invest in payroll software.
Aug 1, 2022

What are the common errors in payroll? ›

Overpaying or underpaying employees. Making erroneous retroactive payments. Missing the first paycheck for new hires. Deducting the wrong amount for benefits or other payroll deductions.

How can I improve my payroll processing? ›

How to Improve Your Payroll Process:
  1. Create and maintain a monthly payroll schedule. ...
  2. Study tax requirements. ...
  3. Create clear and simple payroll policies. ...
  4. Conduct periodic audits. ...
  5. Invest in payroll software. ...
  6. Implement direct deposits. ...
  7. Outsource your payroll.
Feb 9, 2023

How do you ensure payroll accuracy? ›

Know the Best Tips to Run an Accurate Payroll:
  1. Check and Maintain Important Details. ...
  2. Proper Classification of Employees. ...
  3. Check Legal and Regulatory Compliance. ...
  4. Time and Attendance Tracking. ...
  5. Automate the Payroll Process. ...
  6. Data Integrity and Quality. ...
  7. Communication with Staff. ...
  8. Security and Testing.
Aug 21, 2018

What are the strategies to eliminate errors? ›

Five ways to reduce errors based on reliability science
  • Standardize your approach. ...
  • Use decision aids and reminders. ...
  • Take advantage of pre-existing habits and patterns. ...
  • Make the desired action the default, rather than the exception. ...
  • Create redundancy.
Aug 24, 2018

What is the most important control objective for payroll? ›

The foremost objective to establish internal controls in an organization is to curb fraud, theft and forgery. Placing internal controls for managing payroll lessens the risk of fraud by distributing and rotating the responsibilities as many employees can keep a check on the payroll.

What are two of the best practices in establishing a payroll system? ›

5 Payroll Compliance Best Practices
  • Use Payroll Software. If you're still trying to manually calculate your payroll, then you're likely doing it wrong. ...
  • Keep Track of Important Deadlines. ...
  • Always Verify Employees Are Classified Correctly. ...
  • Have a Strong Time and Attendance System. ...
  • Submit Withholdings on a Regular Schedule.
Mar 2, 2023

What is a payroll correction? ›

A correction payroll is a payroll run that happens off of your regular cycle to fix an error that was made in a previous payroll. For most payroll mistakes, time is of the essence when it comes to fixing them, which is why employers often opt to run a correction, or off-cycle, payroll runs in those situations.

What are the four common errors? ›

The Four Most Common Mistakes We Make (And How to Avoid Them)
  • Lazy Mistakes. Arguably the most frustrating mistakes are the ones that stem purely from a lack of effort. ...
  • Ignorant Mistakes. Sometimes mistakes can occur simply because you don't know they exist. ...
  • Beginner Mistakes. ...
  • Systemic Mistakes. ...
  • Taking Action.
Jan 7, 2016

What are the six steps in managing a payroll system? ›

What are the six steps in managing a payroll system?
  • Apply for an employer identification number (EIN) ...
  • Gather employee tax documents. ...
  • Determine a payroll schedule. ...
  • Document terms of compensation. ...
  • Choose a method for processing payroll. ...
  • Open a bank account for payroll.

How can I be a good payroll administrator? ›

5 Essential Traits You'll Need in Payroll Administrator Careers
  1. Numeracy and Mathematical Skills are a Must-Have. ...
  2. Knowledge of Compliance is Essential for Success. ...
  3. An Eye for Detail is Important in Payroll Administrator Careers. ...
  4. Being Able to Work Under Pressure Will Serve You Well.
Mar 20, 2020

What makes a good payroll department? ›

If staff are well trained and equipped to handle payments, they'll do well. So, team members hired must be qualified. Regular re-training of employees will also help staff members correctly understand how payroll works. So, if you have good staff at hand, you'd rarely have issues arise.

What is KPI in payroll? ›

Key performance indicators (KPIs) in payroll are ways of measuring the efficiency and effectiveness of a company's payroll system as these can have a financial impact on the business. KPIs are there to help the improvement of a more streamlined payroll system.

How do you maintain payroll compliance? ›

How do you ensure accuracy in payroll?
  1. Classify workers correctly.
  2. Keep meticulous employee and payroll records.
  3. Stay informed of the latest payroll regulations.
  4. Automate payroll with software programs.
  5. Integrate payroll with timekeeping and benefits administration.
  6. Audit payroll processes regularly.

What is a good example of error prevention? ›

While login to the axis internet banking they ask the user in the end to enter the captcha code. To prevent the users to make slip error they mentioned clearly that the “captcha code is case-sensitive” which suggests the users to check the “Caps Lock” before entering the code.

What are the three main techniques of error control? ›

Some of the common techniques used in error control is acknowledgements, timeouts and negative acknowledgements. In a network, two types of errors occur: single-bit errors and burst errors. With a single-bit error, only one bit of data is altered; in a burst error, two or more bits could be altered.

How do you avoid unnecessary errors? ›

To prevent that, follow these 8 ways to avoid mistakes and you will never have to worry again!
  1. Give Full Attention To What You're Doing. Always focus on your tasks and projects first. ...
  2. Avoid Distractions. ...
  3. Take Breaks. ...
  4. Ask Questions. ...
  5. Create a Checklist. ...
  6. Be Clear About Your Role. ...
  7. Review. ...
  8. Learn From Your Mistakes.
Nov 6, 2017

What two major goals should a payroll system accomplish? ›

One of the primary purposes of a payroll system is to save time and make the process more efficient. You should automate tasks like calculating gross salaries, finalizing net salaries, processing payroll, and generating payslips with the payroll system you choose.

What are three important objectives of a payroll process? ›

The key objectives for any payroll system are to produce payroll accurately, on time, and in compliance with all legislation.

What's the easiest way to do payroll? ›

Hiring a professional accountant or an outsourced payroll service is the easiest solution, but often the most costly. You will delegate most—if not all—of the payroll responsibilities to an accounting professional. Just be sure that your accountant has all the information they need to complete payroll on schedule.

What is the most commonly used payroll method? ›

Hourly wages are the most popular payroll method. It's also the easiest to understand and evaluate for both the employee and employer.

What are the two primary records for payroll? ›

The two primary accounting records used to keep track of payroll amounts are the payroll register and employee earnings record.

What are the hard skills for payroll? ›

The most common hard skill for a payroll specialist is customer service. 13.4% payroll specialists have this skill on their resume. The second most common hard skill for a payroll specialist is data entry appearing on 6.9% of resumes. The third most common is payroll data on 4.6% of resumes.

What 4 things are employers payroll systems required to do? ›

The Five Payroll Basics Every Employer Should Know
  • Pay periods and paydays. ...
  • Collecting employee and employer taxes. ...
  • Paying and filing taxes. ...
  • Federal, state, and local laws. ...
  • Timekeeping.
Jul 1, 2015

What are the three principal areas of payroll? ›

There are three main parts of running payroll typically: keeping employee records, calculating each employee's paycheck, and issuing paychecks.

Who is responsible for payroll mistakes? ›

Employers should fix any payroll errors right away. For most employers, that means by the next paycheck. That said, you might not find the error or the employee might not report it quickly. In that case, it's important to know about payroll processing laws and employee pay rights when the error is uncovered.

How do you apologize for payroll errors? ›

How to Handle Payroll Errors
  1. Step 1: Briefly state the error and apologize. ...
  2. Step 2: Describe what caused the error and show the employee exactly how the correct pay should have been calculated. ...
  3. Step 3: Explain what steps are being taken to fix the error and to ensure it is not repeated.

What is the average payroll error? ›

The average company has an 80% payroll accuracy rate and makes 15 corrections per pay period, a December analysis by EY revealed.

Why is payroll so difficult? ›

It takes time to acquire all the necessary pieces of information from employees, and all that data must be stored somewhere safe and secure yet within easy reach. Payroll management also involves calculating the employees' pay — both gross and net — and withholding federal and state taxes.

Why is payroll so stressful? ›

Payroll processing involves your employees' personal cash flow, and the seriousness alone can create anxiety. All of the work required to stay on top of a complex function like payroll can add to the stress.

What are payroll risks? ›

Payroll risk management – definition

This includes payroll fraud, risks related to compliance with labor and tax laws, errors in calculating and distributing employee pay, and data security and privacy issues.

What are 5 types of errors? ›

What are the different types of errors in measurement?
  • Constant error. Constant errors are those which affect the result by the same amount. ...
  • Systematic error. ...
  • Random error. ...
  • Absolute error. ...
  • Relative error. ...
  • Percentage error.
Feb 27, 2019

What are the 3 basic type of errors? ›

Types of Errors
  • (1) Systematic errors. With this type of error, the measured value is biased due to a specific cause. ...
  • (2) Random errors. This type of error is caused by random circumstances during the measurement process.
  • (3) Negligent errors.

What are the 2 main types of errors? ›

Errors are not always due to mistakes. There are two types of errors: random and systematic.

How does HR manage payroll? ›

Payroll is an employee-facing function, which is why some feel that it belongs with HR. Changing employee pay rates, tracking termination dates and start dates, and entering or changing benefits information falls under the human resource umbrella.

What are the four payroll processing methods? ›

Once you have the relevant tax and legal information to set up payroll, you can choose a schedule that works best for your business. There are four main schedules: monthly, semimonthly, biweekly and weekly. It's important to understand each plan before deciding which is best for your business.

What is the first step in a payroll system? ›

The first step of the payroll process is to calculate an employee's gross wages. You can do this by entering numbers into your payroll system. Determine how many hours each employee worked during a pay period. Then, multiply those hours by the worker's hourly rate.

How can I improve my payroll skills? ›

Seven Easy Ways for Improving Your Payroll Management
  1. Align or Combine Your Different Pay Schedules. ...
  2. Streamline Your Payroll Systems. ...
  3. Upgrade Your Payroll Software. ...
  4. Opt for a Paperless Payroll Process. ...
  5. Maintain Regular Training and Education. ...
  6. Stay Informed of State and Federal Tax Requirements. ...
  7. Outsource Your Payroll Process.
Mar 2, 2016

How do you run a successful payroll? ›

How to manage payroll
  1. Collect and update employee data. ...
  2. Calculate gross pay. ...
  3. Calculate net pay. ...
  4. Determine employer payroll tax contributions. ...
  5. Keep accurate payroll records. ...
  6. Pay employees. ...
  7. Pay government agencies and benefit providers. ...
  8. File tax reports.

What is the most important thing about payroll? ›

When learning how to do payroll, taxes are the most important thing to remember. Federal, state, and local taxes are withheld from an employee's paycheck. An employer must know the current tax rates and include income tax, social security, and Medicare fees so he can properly calculate what the payroll tax should be.

What is the highest position in payroll? ›

As the highest-ranking employee whose primary responsibility is payroll, incumbent is solely responsible for all payroll and related activities.

What happens if there is a payroll error? ›

You might face fines and penalties as a result of an error. The IRS might force you to come up with overtime pay if you miscalculate an employee's pay, and you'll likely need to pay back taxes.

How do I correct a payroll underpayment? ›

Here are some common methods:
  1. Write the employee a check on site for the difference (same day)
  2. Run a correction payroll to issue a corrected deposit. ...
  3. Include the additional amount on the employee's next paycheck (next payroll check date)

What are payroll corrections? ›

A correction payroll is a payroll run that happens off of your regular cycle to fix an error that was made in a previous payroll. For most payroll mistakes, time is of the essence when it comes to fixing them, which is why employers often opt to run a correction, or off-cycle, payroll runs in those situations.

How do you fix an overpaid employee? ›

What's required to collect wages from overpaid employees?
  1. Inform them you plan to deduct the overpayment out of their next paycheck or process a direct deposit reversal, which you have 5 business days to complete. ...
  2. Provide any required documentation.
Apr 11, 2023


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