Correcting payroll errors: best practices for employers

Payroll is a complex process. It requires meticulous calculations, a detailed understanding of employment and tax laws, and the ability to accurately meet multiple deadlines.

As a result, mistakes will happen; what’s crucial is knowing how to make them right. 

In this guide, we’ll delve into some of the common pitfalls of payroll processing, and provide insights on how to rectify — and even avoid — them. We’ll also look at some of the best practices for correcting payroll errors, and explain how to communicate mistakes to your people and maintain trust.

Why is it important to avoid payroll errors?

Payroll errors don’t just generate more work for your finance team; they can have significant consequences for your people.

“For most people, getting paid is an emotional thing. If they don't get paid correctly, or they don't get what they were expecting, they might miss a medical payment or something else that can affect them significantly. Businesses need to understand that payroll is really about the individual and their experience.”

Jonathan Goldsmith, GM Payroll at Remote

As such, it’s critical for you and your payroll team to recognize potential errors, correct existing ones quickly, and put measures in place to help prevent future errors from happening at all.

What are the most common payroll mistakes?

Businesses — of all shapes and sizes — often make the same mistakes. Here’s a breakdown of some of these common errors, including ways to resolve them and, more importantly, prevent them.

Incorrect employee information

This is one of the most common and easily avoidable errors. Inaccurate employee data — such as a misspelled name, wrong address, or incorrect tax number — can lead to severe administrative headaches and legal complications.

Sample scenario

One of your US-based employees gets married and opts to change her last name. However, this change isn’t updated in the payroll system. As a result, the employee’s tax documents are issued under her maiden name, leading to administrative issues during tax filing season.

Resolution steps

Once you identify this kind of error, promptly update the information in your payroll system. In the above scenario, you’d also need to issue a corrected W-2 form with the employee’s new name and make sure all future documents reflect this change.

 If the error leads to issues like misdirected payments or tax document errors, you’d need to take immediate steps to rectify those, as well.

Preventive measures

To prevent these kinds of errors from happening, you could implement an annual “double-check” system, with each employee reviewing all their registered details for accuracy.

You can also simplify this process by using a centralized HR platform, where all your employee data is stored in one place. With Remote, for instance, your employee can check their information and self-serve any changes or updates in our HR Management tool, and this would then automatically be reflected in our Payroll tool.

Pay miscalculations

Errors in calculating wages, overtime, or deductions can have a negative impact on employee satisfaction and your company’s financial integrity.

“For any business, poorly-run payroll impacts retention, sentiment, and motivation. Those are all really big things. It doesn't matter that you pay your employees well if you’re not paying them correctly.”

Jonathan Goldsmith, GM Payroll at Remote

Sample scenario

One of your hourly employees works 45 hours during a particular week. However, due to a manual entry error, they are only paid for 40 hours. This error results in them not receiving overtime pay for the extra 5 hours.

Resolution steps

If an employee has been underpaid, adjust the amount during the next payroll cycle and inform them of the correction. In this instance, you’d calculate the amount owed for the five hours of overtime and include it in their next paycheck. 

However, if the miscalculation is significant and could cause hardship for the employee, be prepared to cover the difference immediately. You should also apologize to the employee for the inconvenience.

Overpayments are trickier than underpayments. Depending on where you and your employee are based, the law can vary; as a result, it’s advisable to consult a legal expert. 

Preventive measures

The easiest way to prevent miscalculations is to invest in automated payroll software, like Remote. This reduces the risk of manual and human mistakes, and automatically calculates the correct amounts based on the data entered.

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Misclassification of employees

Misclassifying employees as independent contractors or misjudging employees’ exempt or non-exempt status can result in serious legal repercussions and back-pay liabilities. As tax authorities around the globe increasingly scrutinize classification statuses, this is becoming a common pitfall.

Sample scenario

Your company hires a content writer as an independent contractor. However, they exclusively work regular hours for your business, have a company email address, and use a laptop provided by you. Even though they are treated as an employee, they receive none of the relevant benefits or protections.

Resolution steps

You would need to convert the contractor into an employee immediately. You would also need to calculate any back pay they are owed, including overtime and benefits, as well as any employer taxes and social contributions. 

You would also need to consult with your legal team, as you may be subject to legal action. 

Preventive measures

Regularly review all your team members’ roles and responsibilities, and look closely at your working relationships with any independent contractors you work with. You can even formalize this process through a quarterly audit.

This is particularly important if your contractors are based abroad, as the rules around misclassification can potentially vary.

Late payroll processing

Delays in payroll processing can lead to disgruntled employees and, in some cases, legal violations. For example, in some countries — and even in individual US states — employees must be paid a minimum of twice per month, while in others, the requirement is once per month. This can also vary by industry or role type.

Sample scenario

Due to a technical glitch in your payroll system, your payroll processing is delayed by two days. As a result, some of your employees are paid late.

Resolution steps

Process the payroll as quickly as possible, or as soon as the glitch is fixed. Note that fixing the glitch should be a priority for your IT team. Send a company-wide email explaining the situation, apologize for the inconvenience, and inform your employees of the new pay date.

If the delay is significant, manually offer adequate advances to your affected employees. You will also likely need to consult with your legal team if the cut-off dates are legally mandated (i.e., they should be paid every 14 days).

Preventive measures

It’s impossible, of course, to predict when a technical glitch may occur. However, using a cloud-based payroll software provider mitigates this issue, as such providers constantly monitor the software, have dedicated security and engineering teams around the clock, and act instantly to rectify any glitches if they occur. 

Errors in benefit deductions

Benefits deductions can be particularly tricky to manage, and can lead to financial discrepancies and employee dissatisfaction. This is especially true if you have employees in different locations, who are subject to different rules.

Sample scenario

A manual error leads to an incorrect deduction for health insurance premiums in two of your employees’ paychecks. This results in higher-than-expected deductions for two pay periods.

Resolution steps

The first step is to correct the deduction error in the payroll system. Next, you should adjust the following paychecks to reimburse the over-deducted amount. 

You should notify all affected employees of the error, and clarify when they’ll see the corrections reflected in their pay.

Preventive measures

You can conduct regular audits of your benefit deductions to help you identify and rectify errors promptly. 

Alternatively, you can work with an EOR provider (like Remote) that manages your team members’ benefits for you — wherever they are based. We ensure that the correct benefits deductions are made and that this is reflected in payroll.

Inaccurate tax withholdings and filings

Errors in withholding payroll taxes can lead to penalties and cause problems for employees during tax season.

Sample scenario

Your payroll system incorrectly calculates federal tax withholdings for several of your employees, causing them to owe more taxes at the end of the year than expected.

Resolution steps

This is a particularly significant error, as it causes extra problems for your team members. You should inform affected employees of the error and adjust their tax withholdings in upcoming pay cycles to compensate for the discrepancy. 

You should also provide additional support or resources for employees to help them understand their revised tax obligations.

Your finance team should also work with the relevant tax authorities to explain and correct the errors.

Preventive measures

Frequently review your payroll system’s tax withholding formulas and adjust future withholdings to compensate for any current discrepancies. You should also stay current on changes to tax laws.

Alternatively, you can work with a payroll provider that does all of this for you — wherever your employees are based. Remote’s local, in-house experts stay abreast of all changes across the globe, and ensure that your payroll is fully compliant and accurate.

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Inconsistent payroll policies

A lack of consistency in how you apply payroll policies can lead to multiple errors and employee grievances.

Sample scenario

Your finance team notices inconsistencies in how overtime pay is being calculated across different departments. This has led to confusion and complaints among employees.

Resolution steps

Review and standardize your company’s overtime policy across all departments (in line with relevant overtime laws), and share the updated policy with all employees and department heads.

Provide training so that everyone involved in payroll processing understands the new policy.

Preventive measures

Conduct a comprehensive review of your payroll policies to ensure they are standardized, documented, and communicated effectively. You can also conduct regular training sessions among your payroll team to apply these policies uniformly.

Improper record-keeping

A failure to maintain accurate payroll records can lead to non-compliance with employment laws and create issues during audits.

Sample scenario

During an audit, incomplete timekeeping records for several employees are discovered. This makes it challenging to verify their hours and pay, and clarify whether they are being paid correctly.

Resolution steps

Implement a uniform timekeeping system that accurately captures all your employee’s hours. Work with them to backtrack and fill in the missing data to the best of your ability, and document any discrepancies or estimates made.

If you discover gaps in your record-keeping, take immediate steps to update your system and maintain thorough records going forward.

Preventive measures

Ensure that your employees are regularly reminded to log their hours accurately.

You can also simplify and streamline this process by working with a payroll provider that provides time and attendance tracking as a core feature. 

Correcting payroll errors for global employees 

If you have employees (and contractors) in different countries, there are some unique payroll errors that you might encounter.

Common global payroll errors

Some common payroll issues for global employees can include:

• Currency exchange fluctuations

Errors often occur when companies fail to account for the dynamic nature of currency exchange rates. This oversight can lead to international employees receiving different pay amounts than intended.

• Compliance with local tax laws and regulations 

If you don’t have the relevant expertise or experience, your company might misinterpret or be unaware of local tax laws and employment regulations in your employee’s country. This can result in non-compliance penalties and incorrect tax withholdings or filings.

• Benefits and social contributions

Companies frequently miscalculate or misunderstand local social contributions and fail to offer appropriate, region-specific benefits. These mistakes can lead to legal issues and employee dissatisfaction.

• Language barriers and cultural differences

Miscommunications due to language barriers or cultural misunderstandings can also result in payroll errors, such as incorrect data entry or misinterpretation of employment contracts and benefits.

How to avoid these errors

If you have employees abroad, you have several payroll options.

In most cases, the simplest and most cost-effective option is to work with a global payroll provider, like Remote. We provide up-to-date expertise of local labor laws and tax regulations, ensuring compliance in all the countries you have employees or contractors. 

We also handle currency conversions, adapt to regional payroll requirements, and accurately manage tax withholding, benefits, and social deductions. 

To learn more about how we can help you avoid payroll errors — and simplify your entire payroll process — speak to one of our friendly payroll experts today.

Communicating payroll errors to your employees 

In several of these scenarios, we’ve mentioned that you should communicate the errors to your employees.

This can be a sensitive process, requiring a delicate balance between transparency and reassurance. However, the way that you communicate and handle these issues can significantly impact employee trust and morale.

“Pay is not about work; it's about how it affects people’s lives. Companies can forget what their role in that is and, through payroll, people can become nameless and faceless. Instead, they need to personalize payroll and own the impact of it when things go wrong.”

Jonathan Goldsmith, GM Payroll at Remote

With this in mind, here are some best practices for communicating payroll errors to your team.

Be transparent

Offer a straightforward, truthful explanation of the error, but don’t assign blame to an individual or a department. Use inclusive language and, as a leader, assume full responsibility for what happened.

Offer a sincere apology for any inconvenience caused, and reassure the affected employees that steps are being taken to prevent future errors.

Lastly, encourage employees to ask questions and provide feedback. This can help you identify areas for improvement in your payroll processes.

Be sincere in your apology

This should go without saying, but be sincere in your apology. As we’ve mentioned, payroll errors are not just simple miscalculations on your back end; they could be the difference between your employee making a mortgage payment or not.

The priority should, of course, be rectifying the error and making the employee financially whole. But how you communicate and handle the mistake can have a long-lasting impact on their happiness and engagement with your company. If you react positively, it can even potentially turn a negative situation into a positive.

Avoid payroll errors with Remote 

Whether you’re paying domestic employees, overseas employees, or both, Remote can help you avoid common errors and ensure a smooth, compliant, and efficient payroll process. 

This means less risk of legal issues, financial penalties, and dissatisfied employees — as well as lower costs for in-house resources or unknown local third parties.

To learn more about our payroll options — and to find the best one for your business — book a demo with one of our friendly experts today.

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