Common Payroll Problems and How to Overcome Them

Managing payroll is a critical task for small and mid-sized businesses, yet it often presents challenges that can affect compliance, employee satisfaction, and operational efficiency. Whether you send out paychecks weekly, every other week, or monthly, one issue you don’t want to add to your HR challenges is payroll issues. You have to withhold taxes, account for overtime, confirm that employees’ timesheet submissions are correct, and so on.

Payroll issues are almost always inevitable. On one hand though, if you are able to track down the issue, you will be able to avoid escalation or quickly proffer a solution. Below, we discuss five common payroll issues and provide actionable solutions to overcome them, ensuring smoother operations for your business.

7 Common Payroll Problems and Solutions

Misclassifying Employees

From time to time, businesses rely on external laborers, such as contract workers, freelancers, and ad hoc staff, to knock out different projects. In the eyes of the law, especially when it comes to withholding and filing taxes, not all your workers are your employees. The mistake that some companies make is wrongly classifying ad hoc staff and contractors as employees. While the regulations vary from state to state, the classification of employees affects things like benefits, taxes, paid time off, and so on.

For compliance purposes, what matters most is the relationship you maintain with each worker. The IRS Publication 15-A provides clarifications concerning the proper classification of employees and independent contractors. If employee classification is wrongly done, it could lead to unpalatable consequences, including fines from the IRS. The classification of an employee determines whether you will withhold employment and federal income taxes or not. It also determines if you need to use a 1099 or a W-2 when reporting to the IRS.

Data Entry Errors

Manual payroll systems are prone to mistakes, such as incorrect hours, tax withholdings, or misfiled employee details. These errors can result in overpayments, underpayments, or even compliance penalties. The solution lies in automation. By adopting payroll software, businesses can reduce manual input and improve accuracy. Regular system audits and team training on best practices can also further enhance data reliability​ for payroll processing.

Another favorable alternative, especially if you are a small business owner, is to partner with a professional employer organization (PEO). PEOs typically have a robust HR administration system that allows small and mid-sized businesses to outsource critical HR functions for a fraction of the actual cost if they take on the tasks in-house. PEOs also bear the burden of tax withholding and other related compliance matters, allowing you to focus on other core business operations.

Overtime and Benefits Miscalculations

Issues can also arise from miscalculated overtime, and this is often due to problems with your time-tracking solutions or the approving officer. Companies that face this problem need to consider investing in reliable time-tracking software to ensure accurate calculations and payment of overtime rates. Sometimes, employees may hit overtime unintentionally. At other times, the issues may arise from how the employee reported their hours. In general, like misclassification of employees, inaccurate overtime calculations can cause serious problems if not handled properly.

A lasting solution, in this case, is to put in place proper time-tracking software or systems and review hours logged by employees before processing the data for payment. This helps HR to keep track of overtime hours that your employees reported. Organizations also need to be aware of the U.S. Department of Labor (DOL) overtime exemption rule as it applies to each type of worker you employ and their industries under the Fair Labor Standards Act.

Remote and Freelance Workers

Hiring out of state or from other countries presents a unique challenge to managing payrolls. Because of the different rules and regulations that apply to different regions, it would be best for HR to do proper research to understand the rules and regulations clearly. Issues like minimum wage, benefits, and pensions may rear their heads — and if you do not understand how these work in the state or region you’re hiring from, it could lead to serious issues over time.

Here are two ways around this challenge:

1. You can engage staff members on your team who understand the dynamics in other places.

2. Or, rely on third-party experts or payroll companies, like PEOs, to do the job for you. It is unrealistic for your HR team to fully understand many country-specific employment laws without consulting an internal or external expert.

Keep in mind that addressing this challenge ahead of time saves your business lots of headaches as well as potential compliance issues.

Outdated Payroll Solutions

As with other problems already highlighted, you want to make sure that your company is solid when it comes to HR software. Your payroll system should be functional and up to date. Every company should invest in accurately tracking workers' time. This is an important investment that HR cannot easily push aside, considering the trouble it will save you. Using an outdated or faulty time-tracking system can cause late payments or miscalculations.

Over time, this can erode employee’s trust in the company. The Evolution of Payroll Technology Trendline Survey by the American Payroll Association (APA) and Kronos revealed that 29% of the 1,000 payroll professionals polled still use payroll systems that are 10 or more years old as of 2018. Outdated payroll solutions provide limited visibility into the impact of payroll on overall organizational performance.

Miscommunications

Again, the lack of proper communication of changes, delays, and errors often causes frayed nerves when processing payrolls. To ensure that both employees and the management are on the same page, HR professionals must communicate policy changes and payroll challenges to workers, preferably ahead of time. This also involves educating employees on tax withholdings processes and any new developments concerning taxes.

Essentially, it means that HR managers need to ensure that they have a solid grasp of these changes. And while mistakes are often inevitable, keeping open communications about issues helps to clear up confusion and assure employees that management or HR is working to resolve the challenges.

Tax Filing Delays

Finally, you want to avoid delaying your company tax filings. Missed tax deadlines or errors in filings can attract penalties, hurting your business financially. To mitigate this, use automated tax filing features in payroll systems that keep track of due dates. Here, we strongly suggest using a PEO to ensure that experts handle compliance and timely filings, giving you peace of mind.

Staying on Top of Your Payroll Issues

Millions of U.S. workers have, at one time or another, received the wrong paycheck — and that affects both the workers and companies. In fact, many lawsuits have emerged from payroll problems. Obviously, managing payroll matters effectively is core to the growth of any business or company. Issues arise from time to time, in which case, it would be best to communicate the challenges to your workers. But at the same time, ensure that your payroll systems are up-to-date and handled by experts.

How a PEO Can Help Solve Payroll Challenges

Many of these challenges can be significantly minimized by partnering with a PEO. A PEO handles payroll processing, tax compliance, benefits management, and employee classification among other important HR functions, leveraging industry expertise and robust systems. This partnership allows small and mid-sized businesses to focus on growth without worrying about payroll pitfalls.

Still Struggling with Your Payroll?

Talk to us today at The Mission. We are a leading partner in the PEO, HR, payroll, and benefits outsourcing marketplace. We are trusted growth strategists focused on helping small and mid-sized businesses overcome HR issues and thrive.

We provide result-oriented services for small and medium-sized organizations and government contractors, serving as a trusted partner in integrated human resource compliance, risk management, employee benefits, employment practices liability insurance (EPLI), and payroll processing.