Payroll is a crucial part of your employee experience (EX).
A hassle-free payroll process is the minimum employees expect, and any errors or miscalculations can lead to employee dissatisfaction. It also exposes your enterprise to compliance risk, financial penalties, and a loss of credibility.
12 Common Payroll Issues and How to Avoid Them
- Tax Calculation Errors
- Incorrect Categorization of Workers
- Incomplete or Unorganized Records
- Delays in Depositing Taxes
- Delays in Providing Tax Forms to Employees
- Inaccurate Pay calculations
- Unsecure Payroll Data
- Inadequate Backup
- Low-Quality Input Data
- Incorrect Overtime Calculations
- Inconsistent Payout cycles
- Missing out on Labor Compliance
Common Payroll Issues and How to Avoid Them
Per the Deloitte Global payroll survey, 2020, only 56% of organizations with 5000+ employees have a standardized payroll across the enterprise. This percentage decreases further down to 27% in small business organizations.
A lack of payroll standardization can lead to the following errors,
1. Tax Calculation Errors
Employee salaries are subject to income tax deductions at source (TDS) and professional tax deductions. The tax slabs and rates may change from time to time. Also, the payroll team must calculate the tax correctly based on standard tax exemptions, investment proofs, and other income declarations submitted by the employee.
Failure to do this accurately can result in incorrect payouts, late fees, penalties, and interest payments.
How to Avoid Cloud-based payroll software automatically updates the latest tax slabs and rates and auto-calculates the payroll tax liabilities. The HR team can provide a self-service portal to employees to enable the timely uploading of investment documents and other income proofs.
2. Incorrect Categorization of Workers
The gig economy is on the rise. Agile enterprises are hiring freelancers, contractors, and part-timers for short-term projects to plug skill gaps. However, TDS rates, tax deductions, and benefit eligibilities for contractors differ significantly from those for full-time employees.
Similarly, the tax rates for partners who work on a commission basis are also different. Incorrect classification of workers, particularly in the context of tax-exempt and non-tax-exempt employees, can lead to non-compliance and penalties for your organization.
How to Avoid The data collected from workers during the onboarding process must be accurate and reflected consistently in all enterprise systems. A centralized worker database serving a single source of truth and integrated with the payroll system can eliminate misclassification errors.
3. Incomplete or Unorganized Records
If your enterprise relies on physical storage or individual devices for holding employee payroll records, chances are that they are tough to search through or have duplicate or incomplete information.
Payroll data include salary slips, tax forms distributed to employees, investments and other declarations submitted by employees, expense receipts, and receipts for tax deposited with the government.
How to Avoid Use a cloud-based storage system or integrated paroll software to securely store all payroll record data in the form of digital documents. It minimizes the possibility of having multiple versions of the same data, commonplace if you use individual employee devices to store records. It also eliminates the chances of physical damage to documents or missing records.
4. Delays in Depositing Taxes
The TDS withheld while processing salaries must deposit with the tax department monthly within specific deadlines. Any delay could lead to penalties and interest payments. Similarly, the professional employment tax deducted while processing salaries must also deposit within annual deadlines.
How to Avoid Ensure payroll runs before time, so data about the tax deducted is available before respective deadlines. Use an automation system to set calendar notifications for important tax deposit dates. Ensure that each tax payment receipt is stored securely in a cloud-based payroll application.
5. Delays in Providing Tax Forms to Employees
Every employer must provide tax forms (Form 16, in India) to salaried employees within deadlines to enable employees to file their individual tax returns. These forms specify the breakup of all salary components paid out in the year.
They also provide a record of TDS deposited by the employer on behalf of the employees. A delay in downloading these forms from the tax department portal and sending it out to employees leads to penalties.
How to Avoid Leverage self-service portals so employees can download digitally signed tax forms. Also, set automated emailers to send out tax forms. You must schedule these emails well before the individual return filing deadlines.
6. Inaccurate Pay calculations
Each employee has a salary structure that comprises multiple elements such as basic pay, allowances, bonuses, provident fund contributions, and more. Each component must calculate according to the structure promised to the employees during hiring or promotions.
Variable payouts and increments must calculate according to performance appraisal data for each employee. Any error in updating these data or calculations can lead to over or underpayments which, in turn, must be settled through out-of-cycle payment adjustments. It results in a bad employee experience and loss of productivity.
How to Avoid Avoid disparate manual systems for recruitment offers, performance appraisals, and payroll. A unified HR Management system (HRMS) ensures that the latest version of the salary structure for every new hire and employee is available automatically for payroll calculations.
Payroll Risk Mitigation Kit
Download Cheatsheet and Checklist to Avoid Payroll Mistakes
7. Unsecure Payroll Data
Securing your payroll data is of paramount importance. Salary data includes identity data such as tax identification (PAN), EPF account numbers, and bank account details. If such data falls into the wrong hands, it puts employees at risk of identity theft and financial fraud.
Moreover, you must ensure salary data confidentiality to avoid unnecessary comparisons among employees within the organization and outside.
How to Avoid Cloud-based payroll applications offer state-of-the-art security by restricting access based on role and designations. They offer accountability by maintaining automated audit trails for every change made to the payroll data. They also ensure payroll data is encrypted and transmitted securely over email and self-service portals.
8. Inadequate Backup
Every enterprise must maintain a backup of payroll data for a minimum period per regional regulatory requirements. These records must be readily accessible for retrospective HR audits or tax audits. Unavailability of these records because of device failure, physical damage, or employee absence can result in non-compliance penalties.
How to Avoid Build redundancy while storing payroll data, so it remains uncorrupted and available even in the case of individual device failure. Cloud-based systems offer automated daily backups, in-built disaster recovery, and intelligent archival algorithms to ensure compliance
9. Low-Quality Input Data
Even the best payroll management system is susceptible to errors if the input data is incorrect. Enterprises tend to over-rely on the automatic calculations provided by payroll apps without ensuring input data checks and validations are in place. Well-configured applications ensure that input data is complete, consistent, and correct.
How to Avoid Minimize manual data entry by integrating payroll applications with other enterprise applications for a seamless data flow. Use intelligent alert systems to notify you of any significant changes in payroll amounts for employees on a month-on-month basis. These alerts must generate before the payroll transfers to employee bank accounts to enable timely double checking. Regular audits also ensure payroll remains error-free.
10. Incorrect Overtime Calculations
Every region has strict rules about the maximum number of hours worked at regular pay, the minimum pay for overtime work, and the maximum number of overtime hours. Errors can occur due to vague HR policies about overtime, incorrect timekeeping, or incorrect overtime pay rates in the calculation. It can lead to unnecessary litigation or statutory penalties and dent employee morale.
How to Avoid Consider biometric attendance systems to measure work time accurately and integrate these with payroll applications. Implement automated approval workflows wherein employees can request overtime, and managers can approve it online beforehand. It improves accountability and minimizes unnecessary overtime wages.
11. Inconsistent Payout Cycles
A non-standardized payroll workflow can result in delayed payouts. Not planning for bank holidays can also result in undue delays in payments. Enterprises are liable to pay interest to employees on outstanding salary amounts beyond specified periods as per local regulations.
Delayed or unpredictable payouts also lead to disgruntled employees, increased complaints, and loss of reputation for the organization.
How to Avoid Implement a strict HR policy determining the exact day payouts transfer every month. In extreme cases, make employees aware of any possible delays in advance. Automate the transfer of payouts to employee accounts by integrating payment processing systems with your enterprise payroll apps. Schedule the payroll calculations and approvals to complete before the payout deadline.
12. Missing out on Labor Compliance
Depending on the country or state of operations and the size of your organization, different labor law compliances are applicable. It is the responsibility of business owners to ensure their incorporation in the payroll workflows.
In India, there are several labor laws related to Employee Provident Fund (EPF), Pension schemes, ESI (Employees’ State Insurance), Gratuity, Labour welfare, Superannuation, etc. Any miss can invite statutory penalties.
How to Avoid Organizations may not be aware of all labor regulations that apply as they grow in size. Engage labor law experts to design payroll policies that align with all relevant laws. Most cloud payroll application providers ensure that the labor laws are configured into the software design and regularly updated.
Impact of Payroll Mistakes on Your Business
When any payroll error occurs, the first thing you do is get it corrected. The process can take a couple of minutes to hours. The situation gets worse when you do it manually. The employee file, you would want to see, may have been lost or misplaced by then. Then the time consumed can extend up to days. The HR and the employee’s time will also go in vain.
This will hamper the productivity of the employees along with the following repercussions:
- Loss of Employee’s Trust: Employees trust their employer; they expect the employer to credit the right salaries into their account without any errors. So, when the employer fails to meet the expectationS of the employees, they start losing trust and even get demotivated. This can affect employees’ loyalties and dedication into less productivity and absence.
- Additional recruitment costs: If the errors are significant, employees may start looking for a job change. When they find one, they will leave your organization. Searching for their replacement will add to your recruitment costs unnecessarily.
- Penalties for committing errors: Penalties for late tax submission, incorrect amount payment, or incorrect employee details- these are just a sneak peek at what payroll errors can lead to. There are many repercussions and penalties that you may have to pay if you do not comply with payroll. Even a single error can cost your business a lot.
While large companies embrace payroll software, payroll services for small businesses are still considered an unnecessary expenditure. “25% of small businesses use pen and paper to track finances, and 45% don’t have their own accountant or bookkeeper” –Clutch
But now, when you know how much payroll errors can cost you, it has become necessary to implement payroll software to your system.
How can Payroll Software Minimize Payroll Errors?
For proper resource allocation, risk mitigation, compensation determination, and positive company culture, it is necessary to minimize payroll errors. To efficiently manage and automate payroll processing workflows, you can implement effective payroll software into your system.
Payroll software offers following features to-
- Auto-assign salary structure to the new joiners for avoiding further discrepancies
- Configure paygroups and pay components department wise or at OU level
- Schedule and pre-define payroll as per the financial year followed by your organization
- Generate error list with employee details after payroll processing at the end of every month
- Compare the difference in pay components and highlight the difference to concerned HRs
- Offer 3D reports to facilitate the salary structure of the complete organization
- Auto deduction of all statutory deductions for PF, ESU, Professional Tax, etc
- Empower both admins and employees while improving their experience
- Generate resorts to analyse effective cost, ctc trends, liabilities and much more
- Integrate with third-party platforms like SAP Business One, Oracle ERP, etc
Payroll software is not just about calculating and process correct salary but with these multiple features, it helps in increasing overall productivity, efficiency and strategy making power of organisation.
The pandemic has given rise to a new set of challenges for payroll processing. Flexible and hybrid workplaces have become the norm. These make timekeeping and leave management complex, which are crucial inputs for payroll calculations.
The 2021 edition of the EY Global Payroll Survey shows that organizations continue to deal with a multitude of challenges, both external and internal, to work towards achieving the payroll function of the future.
Thus, a standardized and automated payroll software is necessary for tackling these challenges and avoiding payroll mistakes for future-ready workplaces.