Eleven Common Payroll Mistakes: Critical Strategies for Prevention, Part 1 

Every business owner knows the payroll process is one of their most critical responsibilities.  Paying employees on time and accurately every pay period is one of the most basic contracts between employers and their staff.  It’s also critical for employers to run payroll correctly and comply with payroll tax requirements to avoid legal consequences, steep fines, and severe damage to the employer brand. The Department of Labor (DOL) has increased wage and hour audits exponentially. In part one of this two-part series, MP’s HR and payroll experts outline some of the most common payroll mistakes– and how to prevent them. 

6 Common Payroll Mistakes 

1. Not screening new hires for applicable breaks in employment taxes. 

Employers should implement a system in their hiring and recruiting process to identify employees who may qualify for a Work Opportunity Tax Credit (WOTC). (which has been extended through December 31, 2025) This tax program allows employers to receive a tax credit for hiring workers who have typically faced barriers to employment. Employers may claim: 

• Up to 25% of qualified first-year wages for 120 – 400 hours worked 
• Up to 40% after employees work 400 hours 

As part of the process to claim a WOTC, employers need to have their new hires complete Form 8850 and submit it to their state employment security agency (SESA) before the 28^th calendar day after the date the new hire begins working.  To avoid this mistake, employers should set up a screening process during their onboarding. This process could include a form that allows new hires to voluntarily identify as somebody in a WOTC-eligible group.  (MP’s talent management software could assist with this task.)  Additionally, employers should prepare to file IRS From 8850 for qualifying new hires within their first 28 days of work. (MP-HR’s payroll software and support team can also assist with tasks like this.) For further efficiency, employers may use electronic versions of these forms. 

2. Misclassifying employees. 

When employers improperly classify a staff member as an exempt employee, independent contractor, etc., they risk incurring serious penalties, interest, as well as legal action, backpay for improperly compensated employee hours and overtime wages, and significant damage to the employer brand.  Employers should update all employee job descriptions and review their pay practices for Fair Labor Standards Act (FLS) compliance.  State requirements and minimum wage laws may impact classifications for employees.  If an employer has remote employees working in other states on their payroll records, they must ensure FLSA compliance and compliance with the state employment laws where that employee lives/works.  Employers should consider working with HR and payroll experts, such as the ones at MP, if they’re not confident all their employees are properly classified.  This type of payroll mistake is particularly costly, so it’s worth taking extra steps to prevent it. 
 

3. Miscalculating overtime, reimbursements, and bonuses. 

Utilizing best practices when handling all of these items is critical for compliance and saving the company money. Developing an IRS-compliant “accountable plan” for reimbursing travel and entertainment expenses helps companies (and employees) will save significant money on payroll taxes. Per the FLSA, overtime wages must be accurately compensated whenever a nonexempt employee works more than 40 hours per week. These are 1.5 times the amount of an employee’s “regular rate,” and can often include commissions, bonuses, and other payments. It’s vital to note some states have varying overtime rules and requirements, so employers with multiple branches, offices, or remote workers must be mindful. As a general rule, employers must comply with whichever rule is most generous to the employee. Sometimes, companies miscalculate overtime pay because they have subpar systems for tracking employee hours or their paid time off (PTO). The time and attendance software offers a variety of methods for employees to clock in and review their own time records and PTO banks.  MP’s payroll software offers special calculators for bonuses and applicable tax rates. The software’s cost is small compared to the steep penalties, backpay, and legal fees an organization could incur.   

4. Mishandling a payroll correction. 

When employers need to subtract or add money from paychecks to perform a payroll correction, they need to review employment law surrounding these actions. In some states, there are legal timeframes employers must adhere to for handling a pay correction.  Some states may also require full payment for work completed by a specific date. Compliance may require cutting checks to handle missing pay or overpayment in between pay periods.  Beyond compliance, it’s also crucial that organizations keep employee engagement and morale in mind when handling a payroll correction.  Especially if the error impacts an employee’s pay negatively and originated with the payroll process, it could make sense not to deduct all overpayments. Engaged, happy employees are productive and a company’s most valuable assets. Handling a payroll correction in an insensitive manner could deeply impact how the employee feels about the company—and what they say to other employees, too.  

5. Missing payroll deadlines.

Many states require organizations to meet pay frequency requirements.   Additionally, employees count on their pay to be processed on time.  Employers should keep a reliable payroll schedule to ensure employees trust the organization to deliver on its cornerstone promise: full payment for their work. Payroll software and easy-to-reach customer support, such as MP offers, will also help an employer never miss a payroll deadline. 

6. Missing a payroll tax deadline. 

Payroll tax deadlines are equally crucial for organizations across all industries. When an employer misses a payroll tax deadline, they may risk steep late fees, penalties, and legal challenges. The most common time for payroll tax deadlines is year-end.  Employers are responsible for: 

• Sending employees W-2 forms or 1099s 
• Completing certain reporting requirements, such as ACA and EEO 
• Paying the correct tax rates for every federal and state payroll tax—especially regarding remote employees or offices in multiple states  

The regulatory landscape surrounding payroll is constantly evolving. While this blog highlights some common pitfalls, staying current on the latest changes is key to avoiding costly mistakes and ensuring compliance. Don’t hesitate to seek professional guidance from HR or payroll experts at MP-HR for complex situations or when navigating unfamiliar territory. Their expertise can provide invaluable peace of mind and safeguard your business from unnecessary burdens.

Remember, this is just a glimpse into the possibilities. MP-HR’s solutions are highly customizable, and our knowledgeable team can help you tailor features to address your specific industry challenges and workflow needs. Contact us today for a free consultation and discover how MP-HR can streamline your payroll, empower your workforce, and propel your business forward.