The Costly Consequences of Payroll Mistakes

Payroll errors cost employers in the United States large amounts of money every year. According to IRS data, a whopping 33 percent of firms make payroll errors at some or other stage. And even the smallest payroll error, for example misclassifying an employee, can lead to penalties and many hours wasted. Below are some of the most common mistakes and their consequences.

Submitting the Wrong Amounts

Although the IRS might forgive your firm the first time, it can penalize you for not submitting the right amount of payroll tax. These penalties can range from as little as 2 percent to as much as 10 percent of the total payroll. And they start accruing on the date these taxes were first due. Your business can also incur other fines, fees, and government penalties.

Criminal Penalties for Late Payments

If the IRS rules that your failure to pay the right amount of payroll taxes amounts to tax evasion, you could be looking at criminal penalties. The maximum amount you can be fined for this is $500,000 or a prison sentence of five years. Even then you still have to pay the unpaid tax and the Trust Fund Recovery Penalty.

Compliance Failure Problems

Ensuring that you comply with all laws governing businesses in your industry or state can be very complex and mistakes are easy to make. Penalties for non-compliance can quickly become significant unforeseen costs. The legislation tends to focus on payroll processes, which means this area is one where you should take the most precautions. Submitting the wrong employee information or making incorrect or late payments can lead to fines and other problems.

Misclassified Employees can Lead to Retroactive Taxes

Your workers have to be classified as either employees or independent contractors. When they are classified as employees, you have to pay them overtime and other benefits. When they are categorized as independent contractors, this is not the case.

If the company mistakenly classifies someone as an independent contractor and he or should have been regarded as an employee the financial consequences could be severe. Not only might the business have to pay retroactive taxes plus penalties on those taxes, but the employee could also claim retroactive overtime pay and other employee benefits. As a rule, the company will in the future also be more closely watched by the Department of Labor.

The Labor Cost of Fixing Payroll Errors

Even the smallest payroll error has to be corrected. The IRS wants to know the exact details of what happened, and workers have to get what they were due in the first place. The hidden cost here is that employees who were meant to spend their hours productively somewhere else must now spend time to fix these errors.

In complex cases fixing payroll errors could take longer than the initial time spent on the payroll.

Payroll Errors and Their Effect on Employees and the Company’s Image

A 2017 report stated that 78 percent of Americans live from one paycheck to the next. This means that receiving the correct amount of pay on payday is of great significance to the average employee. It is understandable, therefore, that the payroll experience is a critical point of interaction between the employee and the employer. A single mistake can start eroding the trust your workers have in you. And two payroll errors can have many of them start looking for another job.
Even worse: if these employees start voicing their anger on social media and it begins to show up in online reviews of your business, it can have a devastating effect on your reputation as an employer.