Common Payroll Discrepancies and How to Fix Them

11 payroll discrepancies to watch out for

Here are some common mistakes companies make when running payroll, along with solutions for each.

1. Entering new employees into your HR system incorrectly

The most important step you can take to prevent payroll discrepancies (and many other issues) is to make sure new employees are put into your HR system correctly. 

“Ensuring your new hires are correctly entered into your HR software will save you a lot of headaches down the road,” said Sundee Peterson, training and development coordinator at Strategic Resources Inc. “This includes [ensuring] the proper accounting codes, labor categories, exempt status and rate of pay are all accurate and kept up to date.”

Solution: Collect essential employee data during recruitment and onboarding. HR software makes this task easier. Consider self-service options that employees can update as needed to avoid delays or inadvertent errors.

2. Misplacing payroll documents

Keeping track of your employees’ payroll records and pay stubs can be challenging, especially as your company grows and hires more employees. With so many documents — such as payroll reports, expense reports and receipts — it’s easy to lose track of some or to introduce miscalculations. An organized payroll system prevents misplaced documents and mistakes in employees’ pay.

“Poor communication between HR, payroll and finance can also make things trickier,” noted Nancy Sanchez, director of payroll at Flex HR. “To avoid these errors, it’s important to keep systems updated and ensure everyone is on the same page.”

Solution: Use payroll software to automate processes and generate payroll reports. These reports should be available within your payroll software so you can access them whenever you need them, though it’s always a good idea to have backups.

Sanchez said you should keep the affected employee in the loop as you work to rectify the discrepancy. “Once you’ve found the error, fix it and keep a record of what happened,” she advised. “To avoid future problems, make it easy for employees to report any issues so things can be sorted out smoothly.”

3. Calculating employee absences inaccurately

Accounting departments need to track employees’ vacation and sick days. This information is important for not only the company’s records but also government regulations. In some states, businesses must offer their employees a certain amount of paid sick leave based on the hours they’ve worked. It can be complicated and frustrating to track multiple employees, especially when there are different types of absences, like vacation, sick leave, sabbaticals and bereavement. 

Solution: Leverage your HR software to track employee absences automatically. HR solutions with self-service options allow employees to take charge of their time off by requesting it as needed and viewing their calendars at a glance.

4. Making errors in payroll deductions

Employee payroll deductions are the amounts an employer withholds from employees’ total earnings to pay for taxes and benefits. These can include income tax, Social Security tax, 401(k) contributions and health insurance premiums. Managing these deductions can become difficult, since many federal and state laws apply to such deductions. Employees also have some say in how much is withdrawn from their pay, which can add another complication.

Solution: Maria Anderson, co-founder of Marico Consulting, said employers should correct the error as quickly as possible while ensuring compliance with state and local laws. “It may be necessary to involve legal counsel to ensure the resolution aligns with regulatory requirements,” Anderson noted. “Once resolved, meet with management to assess what went wrong and implement new controls to prevent a recurrence. This not only restores employee trust but also strengthens the organization’s payroll processes.”

Don’t forget to use a payroll solution that receives frequent updates based on the most current legal information and requirements. This will make deduction errors less likely.

5. Violating overtime rules

Overtime is when a nonexempt employee works more than the normal 40 hours in a workweek. Federal and state laws require employers to pay overtime for these workers. The rate you must pay them depends on the state or city where your company resides. Typically, overtime is 150 percent of the employee’s hourly wage, also known as “time and a half.” As the overtime increases, so does the amount an employee legally needs to be paid. 

Solution: Manual calculation of employees’ hours and wages, particularly for overtime, is more likely to result in errors. Automate the math by using payroll software, which can readily calculate overtime rates and wages.

6. Using incompatible payroll software and programs

Not all payroll software and programs are compatible with one another. As systems become outdated and new ones emerge, they might not work together or transfer data seamlessly. Although you may be able to transfer some of the data manually, it introduces human error and data integrity concerns.

Solution: When you research prospective payroll solutions, look into software that performs multiple tasks or is listed as compatible with your existing systems. To ensure you aren’t locked into a system that will become outdated, seek out payroll software that gets frequent updates.

7. Misclassifying employees

Many small businesses use different types of employees, including full-time, part-time and temporary workers as well as freelance contractors. Companies must ensure that they properly classify each type of employee for tax purposes. A mistake could mean underpayment of taxes, which will cause issues with the IRS and result in costly fines. 

Solution: Review the laws surrounding each type of employee and classification criteria, including W-2 employees versus independent contractors and exempt versus nonexempt employees. If you find that an employee is classified incorrectly, rectify the information in your HR system as soon as you can.

8. Neglecting taxes

Employers that misclassify their employees or neglect to pay payroll taxes on time or in full could face major consequences, such as hefty fines, a shutdown of their business or other troubling legal issues. The IRS is aggressive in pursuing missed payroll taxes, so you need to be diligent about paying the proper amount. 

Solution: Double-check and triple-check tax requirements on federal, state and local government sites, and ensure you file all documents and make necessary tax payments on time. Leverage payroll software to automate calculations whenever possible to limit human error.

9. Miscalculating pay

Some of the most common payroll discrepancies businesses face are underpayments and overpayments, which are often caused by errors in salary calculations, missed overtime or incorrect deductions, according to Janine Lennon, head of payroll services at BrightHR. “In many cases, it’s something as simple as manual data entry errors and missed deadlines that lie at the heart of these issues,” she said.

Factors such as paid time off, holiday pay, commissions, bonuses and rate changes can also be challenging to track, especially for employees with irregular or inconsistent hours. Lizette Fallon, director of finance at Wellspring Center for Prevention, said automated payroll approvals within a payroll platform may present discrepancies for part-time employees who work a different number of hours from week to week. 

“The payroll system automatically runs payroll [for those employees] based on the previous pay period’s hours, and if the gross pay doesn’t match what we expect based on their time cards for the current pay period, we have to manually go back and correct it,” Fallon said.

If you miscalculate pay for an employee, you must offer that employee retro pay on their next paycheck to compensate for the lost wages. If miscalculations become common, the employee may form a negative opinion of your company.

Solution: “To prevent miscalculated pay, you want to make sure your payroll process goes through a rigorous approval process that involves several individuals,” Peterson said. “This process may seem cumbersome, but it ensures everything is entered correctly before checks are processed.”

In addition to using a multiperson approval process, automating pay calculations will cut down on potential math mistakes. Payroll software can do this automation and conduct checks before running payroll to ensure everything is accurate.

10. Missing payroll deadlines

All companies need to adhere to strict schedules for accounting. If you miss a payroll deadline, it can mean an employee does not get paid on time. This mishap could cause a complete loss of wages, depending on expense policies. As with payroll tax deadlines, you need to be hypervigilant about meeting these due dates.

Solution: Stay up to date with payroll deadlines and any government legislation that may affect it. The best payroll software will alert you to due dates and when pay will be distributed. It can also automate many aspects of the payroll process to avoid delays and errors.

11. Failing to comply with payroll rules and regulations

Every state has different rules and regulations for employers, and they’re always changing. To ensure you comply, your business needs to stay up to date on any revisions. Failure to do so could lead to negative government intervention.

“It’s important that your payroll department works closely with HR to ensure all state laws and regulations are being followed,” Peterson said. “HR professionals are keyed into the Department of Labor laws that impact the state or states your business operates in.”

Solution: Ongoing communication between payroll and HR is vital to ensuring all parties are aware of payroll rules and regulations. Additionally, look into payroll software that can run automatic calculations and compliance audits to make the process easier for your HR team.

What is payroll correction?

Payroll correction is when adjustments to an employee’s pay are necessary. This can happen for various reasons, such as the employee or employer not accounting for time off, not submitting overtime, or not adding a commission to the last paycheck of a quarter. When these errors occur, they must be corrected immediately so the missed wages can be added to the employee’s next paycheck.

Importance of payroll management

An organized payroll system can streamline your company’s finances and eliminate human error. A payroll reporting system keeps you in good standing with your employees, as they know they’ll be paid on a routine schedule. It can also keep you up to date with government regulations and provide a simplified look at your company’s finances. You can use this information to plan for your business’s financial future.

“Conducting regular audits of all payroll data, and providing employees an easy and efficient way to report on discrepancies, is also a necessity in my eyes,” said Darian Shimy, CEO and founder of FutureFund. “As a smaller team, it is easier for us to manage communication, but I do recommend larger organizations allow [open] communication between employees and HR to help ensure satisfaction and [the] ability to catch small issues before they grow.”

Additionally, having a robust payroll management system can help limit the number of payroll corrections you need to make. Many software solutions will alert you to potential discrepancies so you can correct errors before you run payroll. Payroll systems can also help you stay in compliance with frequently changing federal, state and local tax regulations — an especially helpful tool if your company has employees in different geographic locations.

How HR software can help avoid payroll discrepancies

One of the best ways to prevent common payroll discrepancies is to use payroll and HR software. Here are some ways HR software can help you avoid errors.

Prevents and identifies payroll mistakes

Once all of the relevant information is in the system, the software does the major calculations for you. This prevents common blunders, like miscalculating information or forgetting to make adjustments. In the event of any errors, the payroll software will alert managers to the discrepancy.

Ensures compliance with rules and regulations

Because it is connected to the internet, HR software can ensure your business’s ongoing compliance with government rules and regulations. When new changes are made, the software updates automatically to reflect them. Then, it informs its users of new changes and makes the necessary adjustments going forward.

Streamlines payroll processes

HR software puts your company’s payroll through a regular, organized system. Pay will be delivered automatically, whether by check or direct deposit. These systems can also remember important tax deadlines for you. 

Increases security

HR software keeps your employees’ financial information safe. Because the software uses security measures such as two-factor authentication, data encryption and security certifications, payroll data is more secure with one of these systems than with a manual process.

Kaytlyn Smith contributed to this article. Some source interviews were conducted for a previous version of this article.