Payroll is a critical part of your accounting and reporting — especially during year-end. Proper documentation and withholding practices are essential to the overall financial well-being of your organization. It may sound simple, but there is so much more to payroll than simply ensuring your employees are paid correctly.

When it comes to payroll, there are a lot of things that can easily fall through the cracks and cause major headaches. To help you avoid the time-consuming and costly consequences of payroll errors, we’ve outlined the most common payroll mistakes we see organizations make (and what they’ll cost you). We’ll also look at the potential solutions to payroll errors and explore important questions, such as “How long does an employer have to correct a payroll when it is wrong?”

1. Errors in an Employee’s Legal Name, Social Security Number, and/or Address

Do you have an Archie Patrick that goes by Pat? Or a Nancy Jane that goes by Janie? It’s important to make sure you use an employee’s full legal name for reporting purposes. The Social Security Administration sends out no-match letters for W-2s if the name on the W-2 does not match the employee’s Social Security card.

An incorrect Social Security number can cause a misapplication of funds for your Social Security amounts. This results in changes to your W-2 and your state unemployment return. An incorrect address will also cause issues for timely filing of W-2s, especially if you mail them.

Not only will you have to amend your W-2, but you’ll also have to amend all your state unemployment returns. If you don’t move quickly to correct these types of payroll mistakes, you’ll face a $50 penalty for each time you provide incorrect information.

2. Not Completing All New Hire Paperwork for Your Employees

When a new hire starts, they must complete specific forms and documents so that you can not only pay them correctly but also report their personal information correctly to both the federal and state agencies. The W4 and I-9 forms are very important and will have all the details needed to report new hire information. It is also hard to contact termed employees when missing information needed for reporting.

If you do not have copies of the new hire forms, you’ll face a penalty in the amount of $50 for every W-2 form that’s incorrect. In addition, it will cost you valuable time visiting the SSA online portal and submitting the corrected information.

3. Not Understanding the Difference Between an Employee and an Independent Contractor

There’s a big difference W-2 employees and 1099 contractors. Misclassification of employees is one of the most common payroll errors, which results in lost benefits for an individual and can cause the individual to pay higher tax for self-employment.

This is a costly mistake for your company and your employees. Not only will your organization owe back taxes and unemployment taxes, but you’ll also owe any unpaid wages and benefits on top of any state and federal misclassification penalties. This can result in high costs for businesses, and not just in terms of money. You’ll also need to invest labor, time, and resources in paying fines, resolving problems, and ensuring that the records you file in the future are accurate.

4. Not Having a Plan Document in Place for Pre-Tax Deductions

Pre-tax deductions, like health insurance or health savings accounts, are a great benefit to employees. Pre-tax benefits offer substantial savings for both participants and employers. However, before you offer this benefit (sometimes called a cafeteria plan), you need to have a plan document in place. Remember that if you are a 2% or greater shareholder of an S Corporation you are not eligible to participate in a pre-tax plan.

Not establishing a documented plan will mean that your entire plan will have to be set up as an after-tax plan, which is not beneficial to either the employer or the employee. Failing to maintain compliance can mean both hefty penalties and a devastating loss of savings to both the participant and the employer.

5. Not Reporting All Taxable Wages on an Employee’s W-2

You should check in with your accounts payable department at least once a year towards year-end. Look for checks written out to your employee outside of payroll. Items like cash bonuses, moving allowances, or non-business-related expenses could be missed taxable wages.

If audited by either federal or state agencies, they could identify this as missed wages and require you to amend past returns/forms. This could be costly for both employer and employee on missed tax payments and penalties.

6. Not Monitoring Payroll Software Updates and Limit Changes for Both Federal and State

When using an accounting or payroll software, make sure you’re closely monitoring your software updates. If you’re not, you could over/under-withhold from an employee and over/under pay the taxes.

Not only will you have to take time to amend your payroll returns and W-2 forms, but you will also have to explain the error to your employees. You may also face additional penalties.

7. Not Reporting the Correct State on Your Employees’ W-2

If an employee has moved from one state to another and/or travels for work in multiple states, you will be required to understand the requirements for the state where the employee is performing services.

Employees may become upset if they are filing their personal tax returns and realize that they have incorrect information on their W-2. This could also require amending the W-2 form and the state returns that are affected by this mistake.

8. Applying Tax Payments to the Wrong Quarter

Your check date determines what quarter your tax payment is applied to. If you misapply this payment, you will receive letters from the IRS that show over- or underpayments depending on how the payment was misapplied.

Depending on how long the payments have been misapplied, making a payroll correction can cost you a significant amount of paperwork and time.

9. Incorrect Time Reporting for Your Employees

It is important to have a time and attendance system to correctly document your employees’ hours for both worked time and non-worked time. Time systems can help account for proper rules on reporting overtime during an employer’s established work week. They also help employees request time off and track their paid time off.

This payroll mistake can put your company’s name into the paper, letting everyone know that you did not report overtime correctly and the amount of back wages that you had to pay out to your employees. This is a costly mistake when you underpay your employees and will also cost your employees’ trust in your company.

10. Not Reconciling Your Payroll Returns to the W-3

Your federal and state forms should always match your W-3 taxable wages and tax withholdings. If this does not happen, you will receive notices to either fix the returns or the W-2s. Correcting this error involves completing paperwork for both federal and state agencies, which can be incredibly time-consuming.

Payroll is Critical to Your Accounting Operations

Failing to maintain proper payroll procedures can be time-consuming and costly. By taking a more strategic approach to payroll, you can avoid these costly payroll mistakes and ensure your payroll is completed timely and accurately.

Some organizations choose to do payroll completely in-house, while others find outsourcing works best. Either way, it is critical that you ensure your organization is up to date on ever-changing regulations and timely with reporting requirements.

The Eide Bailly payroll team has vast expertise in accounting and payroll, ensuring you are accurately documenting and reporting on payroll taxes and preparing the necessary forms. Rest assured that your organization will never miss a payroll, and the process will be done correctly.