How to Reduce Payroll Headaches: Pro Tips

Payroll is an essential business function that relies heavily on accuracy. There’s little room for error in payroll because employees must be paid correctly and on time.

Plus, employers must comply with numerous payroll laws, and mistakes can lead to penalties. However, payroll mistakes do happen, and they can trigger all sorts of headaches.

Types of payroll headaches that can happen

• Time card discrepancies, such as missing punches or incorrect data
• Paycheck errors, such as incorrect gross-to-net calculations
• Problems with W-2 reporting and payroll tax filing
• Incorrect reporting of wages to the government
• Payroll fraud and embezzlement
• Employees become disgruntled due to paycheck errors
• Dissatisfied employees leave negative (public) reviews about the employer’s payroll practices
• Disgruntled employees file wage-and-hour claims or lawsuits against the employer
• The employer is held liable for civil money penalties or criminal penalties
• The payroll errors cause a ripple effect that impacts related functions like human resources, benefits, and finance

That’s quite the list. The good news is that you can reduce payroll headaches by:

• Hiring qualified payroll people
• Segregating payroll duties
• Developing strong payroll policies
• Creating payroll checklists
• Conducting payroll audits
• Outsourcing payroll
• Leveraging best-in-class payroll technology

Let’s explore each of these solutions.

Hire skilled and qualified payroll people

To run smoothly, your payroll department needs skilled and dependable professionals. Otherwise, you can expect many of the previously stated headaches.

If you process payroll in-house, make sure your payroll employees understand the fundamentals and nuances of payroll. Different payroll positions require different levels of knowledge and skills.

For example, a payroll administrator should have a deep understanding of payroll processing. A payroll manager should be versed in payroll administration, compliance, and leadership.

It’s not uncommon for very small businesses to have only 1 payroll employee. This is fine, as long as the employee knows the ins and outs of payroll and has the necessary soft skills.

If you outsource payroll, consider having someone at your company serve as a liaison between you and the payroll provider. The liaison is responsible for verifying the provider’s work. They can also serve as the point of contact for payroll inquiries from managers and employees.

Segregate payroll duties to minimize payroll fraud

Segregation of payroll duties helps you minimize payroll fraud and embezzlement by payroll employees.

For example, paying “ghost” employees is a common type of payroll fraud. Basically, a payroll employee creates a payroll record for someone who does not work for the company and then pays them a salary or wage.

By segregating payroll duties, you ensure that no one has sole control over your payroll activities.

Another tactic is to prolong the pay of a terminated employee. Either way, the salary or wage ends up in the hands of the dishonest payroll employee.

By segregating payroll duties, you ensure that no one has sole control over your payroll activities. Even if you have only 1 payroll employee, someone else should be checking their work and verifying payroll transactions prior to payday.

Segregation of payroll duties also helps you define payroll roles, thereby eliminating confusion about who should perform what payroll tasks.

Develop strong payroll policies for your company

This helps you establish boundaries for payroll and non-payroll employees. The policies should inform employees of their payroll rights and responsibilities, plus outline how things should be done within the payroll department.

Payroll policy inclusions:

• Only employees are eligible for payroll. Independent contractors are excluded.
• Payroll calendar that includes pay periods and pay dates
• Procedures for submitting time cards
• Meal and break periods
• Additional payments, such as overtime, bonuses, commissions, and retroactive pay
• Paid time off
• Payroll deductions
• Final paychecks
• Method of payment, such as direct deposit, pay cards, and live checks
• How to submit payroll action requests
• Procedures for handling underpayment or overpayment of wages or salaries
• Procedures for making payroll inquiries. For example, the employee needs to go through their manager, who then contacts payroll.

You can put many of these policies in your employee handbook.

Develop separate policies for how things should be done within your payroll department. Only authorized individuals should have access to these internal payroll policies.

Create payroll checklists to stay organized

If you do payroll in-house, consider creating checklists for:

• New hire processing
• Payroll processing
• Payroll tax filing
• Final pay processing
• Year-end processing
• W-2 processing
• Payroll accounting
• Payroll laws you’re required to follow

These checklists can help you stay organized and abreast of your payroll responsibilities.

Conduct payroll audits to detect strengths and weaknesses

Payroll audits help you detect strengths and weaknesses in your payroll system, processes, and procedures.

For example, you can:

• Confirm whether you’re paying your employees fairly and competitively
• Spot payroll processing mistakes, and the reasons for them
• Evaluate the effectiveness of your compensation strategy
• Detect payroll fraud, including who committed it
• Determine whether you’re conducting payroll in the most efficient way
• Zero-in on payroll improvement areas, and devise solutions
• Assess interactions between payroll, HR, benefits, and finance
• Verify how well you’re complying with payroll laws

You should be conducting payroll audits at least once or twice per year.

Outsource payroll to a reputable provider

In a 2021 survey by HR Dive, “53% of respondents said their departments regularly used a payroll processing service.”

The bottom line is that payroll can be time-consuming and costly for businesses with limited resources.

Consider handing over the reins of your payroll to a reputable provider if:

• You’re making a lot of payroll errors.
• You don’t have time to do payroll.
• It would be more cost-effective to outsource payroll.
• Your payroll staff lacks the required expertise.
• You’re struggling to maintain payroll compliance.

If you decide to go this route, make sure you perform due diligence on the provider. For more information, see “5 Things to Look For in a Payroll Vendor.”

Leverage best-in-class payroll technology

It is possible to run payroll accurately by hand/manually. However, odds are high that you will make mistakes that could have been prevented with payroll technology.

You can alleviate headaches by utilizing a payroll solution that makes payroll much simpler.

By choosing to run payroll manually, you risk encountering virtually all of the payroll headaches listed earlier. This includes paycheck errors, disgruntled employees, wage-and-hour complaints, lawsuits, and governmental penalties. Moreover, there’s the threat of paper clutter causing a disorganized and frustrating payroll experience.

You can alleviate these headaches by utilizing a payroll solution that makes payroll much simpler. Consider choosing a system that integrates payroll with time and labor, employee benefits, and human resources. This will help cut down on the amount of time spent on payroll and reduce errors.

For more information, see “How to Choose the Best Payroll Software for Your Business.”

Keep payroll headaches to a minimum

Payroll is ultimately administered by humans. Therefore, mistakes can occur. This is true, even if you’re using payroll technology.

The goal is to minimize payroll errors as much as possible. You can achieve this by hiring qualified people, segregating duties, creating policies and checklists, performing audits, outsourcing payroll, and/or leveraging payroll technology.