Payroll Pitfalls: Avoiding Mistakes That Can Cost Your Business
Many small and medium-sized business (SMB) owners assume payroll is merely a matter of plugging in numbers and cutting checks. All too often they find that’s a costly assumption.
Payroll pitfalls lurk everywhere. When SMBs fall into them, the costs in time, fines, employee relations and, in extreme cases, jail time, can inflict enormous pain on you and your business.
This eGuide identifies the most common payroll concerns, the potential consequences for errors and how to avoid those errors.
PAYROLL PITFALLS
LURK EVERYWHERE.
Mistake 1: Onboarding oversights
The first pitfalls arrive early, during the onboarding process.
For one, too many SMBs fail to input all the necessary information needed for processing payroll or fail to do so in a timely manner, perhaps waiting until the first payroll reporting date to enter the new hire.
Consequence:
Too often, these errors lead to missed initial paychecks that leave new employees frustrated and concerned. This is not the way to start a productive working relationship.
Another common mistake during onboarding—and one with potentially expensive penalties— is when SMBs place an employee in the wrong Fair Labor Standards Act (FLSA) status. It is not always easy to understand the distinction between exempt and non-exempt employees.
Consequence:
The wrong FLSA status for an employee could lead to an audit by the Department of Labor and/or state and local equivalents, perhaps leading to penalties, back wages, interest, and other damages.
The TriNet approach:
TriNet’s HR platform has built-in triggers that proactively find and alert SMBs of potential errors or missing data—and TriNet also provides resources and best practices to help support customers, so they have the tools to select the proper FLSA status. In addition, TriNet experts are available to help you make fully informed decisions about your employee set-up for proper payroll and payroll-related processing.
Mistake 2: Entering and tracking pay incorrectly
Accurately calculating the regular rate of pay (RRoP) requires that your payroll reporting system accounts for each worker’s total compensation, including bonuses and incentives. SMBs must clearly define which types of remuneration are subject to or excluded from the RRoP computation. If that value represents a timeframe other than a single pay period, the SMB must allocate the payment over that specific timeframe, leading to a recalculation.
This is more complex than it might first appear. For example, federal law states that if a non-exempt employee works more than 40 hours in a seven-day workweek, the business must pay overtime on all hours worked in excess of 40. Some states have different requirements for when overtime rates must be paid. Even with automated time and-attendance systems, many companies on a semi-monthly pay cycle struggle to calculate the proper overtime rate when the pay period splits workweeks. And because most payroll systems can’t look back into the past and account for the overtime hours, payroll personnel must remember to manually calculate the adjustment.
Nondiscretionary bonuses or commissions are another area of surprising complexity. They must be treated as regular wages when calculating overtime pay. If you award a bonus in the same pay period it is earned, most time-and-attendance or payroll systems easily handle the calculation, but in certain cases, you might award the bonus or commission in a later pay period. One example: when a mortgage broker sells a loan in one month but the commission is booked in the next month. (In most cases, non-exempt employees are eligible for overtime pay.) In such cases, you must apply the overtime pay from the prior month to the bonus this month. You must not only correctly calculate the proper compensation, but also keep track of when you owe additional overtime pay for nondiscretionary payments.
“Since we started working with TriNet in 2014, I haven’t had to worry if payroll processed properly, about our payroll taxes nor benefits. It’s a one stop shop; I love having one place to go.”
Co-Founder and CEO, Dagne Dover
The wrong FLSA status for an employee could lead to an audit by the Department of Labor and/or state and local equivalents, perhaps leading to penalties, back wages, interest, and other damages.
• Failure to comply with minimum wage or salary basis requirements.
• Misallocation of earnings: paying a bonus or allowances instead of overtime pay to a nonexempt employee for overtime hours worked or paying a nontaxable reimbursement instead of a taxable allowance.
• Not paying within state required payday rules. Some states require payments for wages earned to employees on or before a specific date. In California, for example, you must pay exempt employees by the 26th day of the month if paid on a monthly basis.
• You must designate a rate of pay for each job and remember that you pay some people different rates for doing different jobs.
- Failure to comply with minimum wage or salary basis requirements.
Misallocation of earnings: paying a bonus or allowances instead of overtime pay to a nonexempt employee for overtime hours worked or paying a nontaxable reimbursement instead of a taxable allowance.
Not paying within state required payday rules. Some states require payments for wages earned to employees on or before a specific date. In California, for example, you must pay exempt employees by the 26th day of the month if paid on a monthly basis.
You must designate a rate of pay for each job and remember that you pay some people different rates for doing different jobs.
Consequence:
Not tracking FMLA or other extended leave correctly can result in potential legal claims for noncompliance or discrimination. And if you pay an employee too much, you run the risk of an insurance claim being partially or fully denied.
The TriNet approach:
TriNet’s HR platform offers specific tools for time off and, for example, entering leave with pay to supplement disability insurance benefits, or leave without pay, thus removing much of the error-prone work from the dangers of manual entry. In addition, TriNet’s experts provide guidance on various aspects of leave.
Mistake 3: Entering and tracking hours correctly
In addition to properly entering rates of pay, SMBs must confirm they are properly identifying and entering the hours worked, along with any other hours that must be captured in the wage statement and wages paid. Again here, there are numerous error-prone areas, including:
- Not properly identifying hours worked that must be entered as overtime hours.
Not allowing uninterrupted breaks for the required amount of time.
- Not properly entering paid time off (PTO), which can include vacation days, sick days, floating holidays and many others.
Consequence:
Failure to pay overtime wages can incur penalties, fines, back wages, interest, and damages. Depending on the jurisdiction, failure to provide compliant mandated breaks may require compensating the employee with a meal/rest period penalty payment equal to an hour of pay using the regular rate of pay, as opposed to the contractual rate of pay or an hour of regular wages as if no break was taken. Tracking PTO hours incorrectly could result in underpayment or overpayment of unused accrued hours when calculating final pay during termination, potentially leading to additional penalties or damages owed. Another compliance risk is that many states require time off balances to display accurately on the paycheck, with penalties assessed for each violation.
The TriNet approach:
TriNet’s HR platform offers specific tools for time off and, for example, entering leave with pay to supplement disability insurance benefits, or leave without pay, thus removing much of the error-prone work from the dangers of manual entry. In addition, TriNet’s experts provide guidance on various aspects of leave.
“TriNet knows the employment laws and rules for every location and that gives me a reason to be able to sleep better at night. It’s very difficult to know what each location requires, so the compliance issue is huge.”
Adrienne Giannone
President and CEO, Edge Electronics
Mistake 4: Improperly entering extended leave
Extended leave is an extremely complex category unto itself. Beyond PTO, there are many overlapping requirements with which SMBs must comply, including leave associated with the Family and Medical Leave Act (FMLA). Consider:
Certain levels of paid leave are provided by many companies
Overlapping paid leave and state short-term disability insurance benefits in which a portion is paid by the state and a portion by the company.
Short-term and long-term disability insurance benefits reimbursement rates for when an employee transitions from one to the other.
Mandated parental leave required by some states.
Protected, but unpaid leave which is available to employees under the FMLA and other applicable laws.
Consequence:
Not tracking FMLA or other extended leave correctly can result in potential legal claims for noncompliance or discrimination. And if you pay an employee too much, you run the risk of an insurance claim being partially or fully denied.
The TriNet approach:
TriNet’s HR platform offers specific tools for time off and, for example, entering leave with pay to supplement disability insurance benefits, or leave without pay, thus removing much of the error-prone work from the dangers of manual entry. In addition, TriNet’s experts provide guidance on various aspects of leave.
Mistake 5: Improper benefit deductions, including retirement
Health benefit elections may change. For example, employees may experience life status changes that allow them to change their benefit elections mid-year. Rates change every year, companies may change cost-sharing arrangements, and participants may change their elections during open enrollment. And deductions may either be pre- or post-tax.
Additionally, with retirement benefits, participants may be able to change their contributions and some plans may provide for both pre- and post-tax employee contributions.
Consequence:
Failure to enter deductions correctly can lead to frustrated employees and administrative headaches. It can be very complicated or impossible to retroactively set up benefits deductions.
The TriNet approach:
With TriNet-sponsored health benefits, you receive timely annual prompts to update your benefit strategy solutions for open enrollment to account for any changes. With TriNet sponsored retirement benefits plans, TriNet will process any election changes so your employee and employer contributions are accurate and up to date.
Mistake 6: Improper payroll tax withholding and payments
The growth of distributed and multi-state workforces makes payroll tax withholding and payments more complex, not least because payroll taxes diverge at the state and local levels. Moreover, in some places the tax implications go beyond typical tax withholdings. For example, New York now has a parental leave tax, which can make tax calculations quite complicated and error-prone.
Consequence:
Failure to withhold payroll taxes accurately and/or failure to file payroll tax returns and remit payments in a timely manner could subject your company to penalties and interest.
The TriNet approach:
For tax with holding and payments, good data matters. When TriNet is the system of record for employees, it uses the data you input such as roles, employee status and where people work. Our systems also calculate, withhold, remit and report taxes down to each locality.
Mistake 7: Improper employee termination procedures
When terminating employees, SMBs must pay any final wages owed in a timely manner and meet applicable requirements depending on where the employees work.
Consequence:
Failure to terminate properly can incur fines, penalties, back wages, damages and, potentially, lawsuits.
The TriNet approach:
For termination processing, TriNet’s HR platform contains a form that allows the platform to assess whether the SMB must pay the terminated employee on the termination date or if the SMB can pay after that date. The form also allows the platform to assess whether compliance payment is applicable. For this to work, SMBs must submit their employee’s termination information to TriNet before it occurs, which enables TriNet to help keep your company in compliance with applicable laws.
The Solution
As we have demonstrated throughout this eGuide, a full-service HR platform, like the one TriNet offers, helps avert many of the problems we’ve highlighted. This platform combines with an experienced team that has payroll-specific experts readily available to help you mitigate many of the risks of processing payroll and, more broadly, HR administration.
A full-service platform also averts a common problem associated with acquiring ad-hoc HR software over time: a disparate, poorly integrated combination of applications that is a recipe for missing or incorrect data. In contrast, a full-service solution unifies time off, time and attendance, benefits administration, expense management and leave management within a common HR platform and payroll engine.
Moreover, at TriNet, the systems and processes embedded in the platform are rooted in 32 years of experience and a client list of thousands of businesses and hundreds of thousands of worksite employees. The platform is also backed by the aforementioned team of experts who are dedicated to helping you take full advantage of the
