Preparing payroll can be a complicated, time consuming, and stressful task. The tedious nature of the job makes it prone to errors, ranging from monetary losses, a diminished company reputation, to regulatory penalties. To prevent mistakes, identify where the potential risks are. Then establish controls and procedures that reduce and/or eliminate the risks. Following are some of the most common payroll pitfalls.
Difficulty calculating overtime: Determining overtime pay involves monitoring overtime hours, determining the correct rate of pay and adding overtime to normal wages. This requires not only complex calculations but also the need to keep up to date on the Employment Standards Code.
Incorrect classification of employees: Proper classification of all workers is essential for accurate payroll and tax deductions. Calculating pay for independent contractors, temporary employees, and freelancers is not the same as determining pay for permanent employees. Misclassifying an employee can result in fines and administrative difficulties.
Mistake prone time records: Payroll complications may start with your method of recording hours worked. Illegible handwriting, misheard or misremembered time totals, and improper data entry can all result in under or over paying an employee(s).
Missing payroll deadlines: Leaving the complex task of payroll calculation to the last minute can lead to errors or missing deadlines. Holidays and other special events may throw off your usual schedule culminating in late remittance and resulting in unhappy employees and the possibility of legal troubles.
Lack of compliance: The wrong tax rate, mismanaged payroll documents, missed deadlines, and the inability to keep up with changing government regulations can result in noncompliance and lead to fines and penalties.
Security problems: A breach in payroll confidentiality can cause loss of reputation, diminished revenues, loss of competitive advantage and/or legal consequences. Payroll information must be protected from any possible data leak.
Issues with year-end preparations: Inaccurate and/or incomplete payroll records can lead to challenges when completing the fiscal year-end report. Good organization and planning smooth the year-end process.
Over reliance on a single employee: Relying on a single person to handle payroll increases the risk of identity theft, embezzlement and/or falsification of documents for personal gain. It can also leave you in the lurch in the event of illness and/or injury.
Difficulty with complicated deductions such as retroactive pay, garnishments, levies and child support are especially challenging and time consuming. There are risks for both under and over payment. Establish policies and procedures and make sure they are followed. Track hours carefully.
The goal is to run payroll calculations error-free. To do so, identify the weakness in your system then establish best practices to assist the payroll process. Pay particular attention to compliance rules, year-end preparation, overtime calculations, employee classification, time record procedures and complex deductions. Be sure to train several employees in payroll preparation and consider using one of the many efficient online payroll systems.
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