How to correct payroll errors

Payroll errors come in many different shapes and forms. In addition to wrongful payroll calculations, there are several other things that can go wrong in payroll. Since payroll mistakes can become very costly for organizations on many different levels, reducing the error frequency in payroll is a top priority for businesses of any size.

But what are the different types of payroll errors to avoid at all costs? How long do employers have to correct errors in payroll? And how to fix payroll mistakes once they have happened?

Errors happen, and payroll is no exception to that. In fact, payroll errors happen quite often—especially in businesses that rely on manual payroll processes instead of using payroll software. The severity and consequences of payroll mistakes depend on the type of error that has occurred.

The most common payroll errors are:

• Late payments that result in employees receiving their wages and salaries on a date later than their actual payday,

• Overpayment of employees,

• Underpayment of employees,

• Employee misclassification, i. e. wrongful classification of a worker as independent contractor although they really should have the status of an employee,

• Incomplete payroll records where important information and forms are missing or that don’t cover the period of time required by law,

• Missed deadlines for reporting and submitting withheld payroll taxes,

• Inaccurate payroll reporting that is either based on incorrect data or doesn’t account for all elements of an employee’s compensation (e. g. not accounting for fringe benefits),

• Failure to implement legal changes that affect payroll (e. g. updating tax rates for income tax and social security contributions in the payroll system),

• Wrong calculation of overtime pay, or

• Incomplete tax forms.

Keeping quiet about payroll errors will only make matters worse. The best strategy is to take a proactive approach and be open about what has happened. In most cases, payroll errors will affect certain employees, which is why the latter should be informed about the mistake that has occurred.

This includes telling them:

• What the payroll mistake is,

• How it affects their pay,

• How the mistake has happened,

• What is being done to correct the mistake,

• When the process will most likely be completed, and

• What measures are being taken to prevent a similar mistake from happening again.

In a next step, all this information should be written down in an official payroll processing error letter, which is then sent out to the employees whose paycheck is affected.

Whether underpayments can wait until the next paycheck to be corrected or whether it’s necessary to issue an off-cycle payment to the affected employee depends on the rules and regulations of the respective country—or state when referring to countries like the United States.

The basic rule for payroll errors is to fix them as quickly as possible. The longer it takes to rectify the error, the higher the risk that the problem grows bigger. For instance, if undetected, incorrect calculations of overtime pay will enter the business’s payroll reports that are submitted to the tax authorities, which causes a lot more work in the end.

However, the problem is that mistakes can go unnoticed for quite a long time. Sometimes it isn’t until the next payroll audit that mishaps are spotted. When employees don’t notice that there’s something wrong with their paycheck, correcting payroll errors retroactively can become difficult.

In the case of payroll mistakes that lead to inaccurate statutory reporting, the respective authorities should be informed without delay. As a next step, the reports should be corrected and resubmitted.

Payroll errors can have numerous consequences ranging from unhappy employees to issues with statutory authorities for non-compliance with payroll rules and regulations. Here is an overview of what payroll mistakes can really mean for a business:

• Negative impact on the employee-employer relationship: Payroll errors often lead to incorrect or late payment, which weighs heavily on the employees’ trust in the organization and their motivation to deliver their best work.

• Financial struggles for employees: Many employees live from paycheck to paycheck. If the awaited salary payment is late, this might mean that employees are unable to pay their bills on time.

• Increased employee turnover: If salary payments are late or incorrect on a regular basis, this is likely to decrease the employees’ loyalty towards the business and lead to higher employee turnover as workers start looking for other jobs.

• Problems to attract new talent: Frequent payroll errors don’t go unnoticed. In the worst case, former employees will talk about how unreliable payroll is at the organization, which can damage the company’s reputation and make recruiting new talent more difficult.

• Additional work for HR and payroll teams: Fixing payroll errors is a tedious and time-consuming task that prevents HR and payroll professionals from focusing on more important parts of their job.

• Compliance issues and fines: Payroll is closely related to regulatory compliance with regard to taxes, statutory reporting, benefits administration, and more. Payroll mistakes not only affect employee paychecks, but these mistakes can further lead to miscalculated tax payments and inaccurate payroll reports. Depending on the severity of the mistake, statutory authorities may issue fines and financial penalties for resulting non-compliance.

The most important thing to keep in mind when dealing with payroll errors is to be upfront about it and not try to hide it. The general procedure for fixing payroll errors is as follows:

• Communicate payroll errors to affected employees (and authorities if necessary)

• Correct any wrong payments that may have resulted from the mistake either by issuing an off-cycle payment or by adding the missing amount to the next regular salary payment (in case of an overpayment, you can withhold the surplus from the employee’s next paycheck)

• Correct payroll reports (if necessary) and submit the corrected version to the authorities together with any outstanding tax payments

• Implement new processes and procedures to prevent the same mistake from happening again in the future

• Raise awareness among employees to check their payslips and payments

Instead of worrying about fixing payroll errors, businesses should focus on taking action to stop mistakes from happening. One way of getting there is to use payroll software to automate manual data entry tasks that are prone to error. 

Modern payroll software can not only perform payroll calculations but leverages payroll automation to streamline processes and put payroll tasks on autopilot. Payroll processes that can be automated include:

• Time and attendance tracking,

• Expense management,

• Data input collection for payroll,

• Payroll reporting,

• Data transfers between different systems,

• Payroll calculations audit, and

• Payroll compliance alerts.

In addition, organizations should have internal control mechanisms in place to spot payroll errors early on in the process. It’s also important that roles and responsibilities in the payroll department are clearly defined.