Payroll Adjustments: A Guide for Small Business Owners

October 6, 2023
Payroll Adjustments: A Guide for Small Business Owners

Making payroll adjustments for employees is an important part of running a business. A pay adjustment is any changes to an employee's pay, whether an increase or decrease, one-time or long-term.

A pay raise is a common example of a permanent pay adjustment. A business also might need to make a temporary payroll adjustment, such as a correction to an overpayment. Either way, it's important to carry out this function properly for wage and hour compliance and morale.

Reasons for Payroll Adjustment

There are many reasons for a payroll adjustment. Some of the most common reasons may be:

Changes in employment status

If an employee's contract is terminated as a result of a separation, you may need to adjust their pay. You may be required to pay terminating employees for any earned but unused paid time off. Changes in job duties, such as an increase in responsibilities, can also mean a pay adjustment. This change may also come with a new job title or exemption status.

Changes in salary or wages

To stay competitive within your industry, you may consider pay raises to your employees. These changes may relate to increases in the cost of living in the area or a market adjustment, or to achieve pay equity.

Overtime wages are a frequent adjustment made for nonexempt employees based on the number of hours over the non-overtime threshold in a workweek, typically 40 per workweek.

Changes in wage and hour laws

Staying on top of wage and hour and other employment-related laws is an important part of payroll compliance. Laws concerning the federal, state or local minimum wage, for example, often change. It is your responsibility to adjust wages accordingly.

Using an HR software service and expert support like TriNet can help your company with these adjustments quickly and accurately when running payroll. This can help prevent potential payroll processing errors that may require a payroll adjustment down the road.

Changes in benefits and allowances

Some changes in benefits can necessitate a compensation adjustment. This can be a gross-up adjustment, for example, to cover the income and payroll taxes owed on the benefit.

Process of Payroll Adjustment

It is important to communicate with employees about how payroll adjustments are handled by your company. Some jurisdictions require employes to notify employees a specific number of days before or after certain pay and payroll adjustments are made, and certain types of payroll adjustments require an employee authorization to be executed, such as wage deductions. Even in jurisdictions where notice of the pay or payroll adjustment is not required, employees usually would like to know why.

Also make sure to communicate pay and payroll adjustments with the appropriate leadership and supervisors in advance of any changes.

Taking a few simple steps can help to ensure a smooth payroll adjustment process, including:

What is the extent of the payroll adjustment?

You've determined that an employee requires a payroll adjustment. Now what? First, check for compliance with wage and hour and employment laws.

Payroll adjustments must comply with all relevant federal, state and local laws. HR software can be helpful, but having a human resources professional oversee this task can be beneficial.

As an example, you want to make sure that employee payroll adjustments are equitable and are not discriminatory in nature. Avoiding bias in payroll adjustments can help you stay compliant with several federal anti-discrimination laws including Title VII of the Civil Rights Act, the Equal Pay Act (EPA) and the Americans with Disabilities Act (ADA), as well as their state and local equivalents.

Second, consider your standard policies and practices. Many companies have guidelines that dictate when and what pay increases will occur based on bona fide factors that are met such as an employee’s seniority or experience. If there are no such guidelines, consider the following steps:

  • Discuss pay adjustment options with leadership and get their input.
  • Study relevant historical pay reports from your company. This helps you to get a better understanding of company precedent and decide accordingly.
  • Look at the job market and make relevant data comparisons.

Document changes

Document the changes in accordance with applicable wage and hour and employment laws and your company policy. You should keep a copy of this documentation on file as a part of employee recordkeeping according to those laws and be sure to share a copy with the employee for their own records.

Finally, make the payroll adjustment as appropriate.

Challenges and Pitfalls in Payroll Adjustments

To remain compliant with relevant income and payroll tax laws and employment-related rules and requirements, it is important to comply with these requirements when making payroll adjustments. It can be easy to make errors in processing payroll, especially with manual data entry. Payroll processing software can be a great way to help reduce data entry errors and ensure payroll compliance.

TriNet offers an extensive offering of payroll related and HR services that helps make payroll processing easy. Our payroll experts can help small and medium-size businesses stay on top of payroll compliance issues.

With TriNet, you’ll find the resources and systems you help with onboarding and payroll processing services as you scale up your business. Even without an HR department, our HR software and self-service tools make it easy for you to make payroll adjustments.

This communication is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance.

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