Payroll Adjustment

Wages, salaries, and employee benefits change often, as indicated by monthly Bureau of Labor Statistics reports.¹ And every change requires a payroll adjustment. Human Resources professionals involved in overseeing the adjustment process should understand why payroll adjustments are important and how the process works.

Payroll adjustments must be timely and accurate for 2 main reasons:

• To ensure that employees receive the correct pay.
• To stay in compliance with employment laws and regulations requiring employers to keep accurate payroll records.

Here’s an overview of the different types of payroll adjustments, when they’re necessary, and the steps for making those adjustments.

What is payroll adjustment?

A payroll adjustment reflects any changes to employee compensation, as well as corrections to oversights resulting from tech or human error. The appropriate changes must be made to the amount paid in the employee’s paycheck or deposit and also to the payroll records.

Pay adjustments can be for one-time events, such as special bonuses, or they can be for longer-term changes, such as raises that accompany promotions or annual cost-of-living increases. The types of payroll adjustments that an employer or HR department may have to manage can vary.

Types of payroll adjustments

Some of the most common types of pay-increase adjustments include:

• Raises and promotions. All increases in an employee’s regular pay must be accounted for.
• Cost-of-living increases. These periodic (usually annual) increases typically affect many or all employees at the same time. Their pay and records must all be changed accordingly.
• Bonuses, incentives, and commissions. These are types of variable compensation that must be added to the employee’s total pay for the appropriate pay period.
• Overtime pay. It’s especially important that overtime wages be paid correctly to comply with federal, state, and local regulations.

Other typical adjustments involve:

• Demotions or other pay cuts. When an employee’s pay is cut due to performance issues, changes in work shift or hours, or for other reasons, you’ll need to make a pay adjustment.
• Deductions and withholding taxes. Any changes in the amounts that employees contribute to their benefits package or that are withheld from their pay for taxes must be adjusted correctly.
• Sick leave and vacation time. Both paid and unpaid time off should be accounted for in payroll records.
• Employees leaving. Federal and state regulations require that certain types of payments be included in an employee’s final paycheck.
• Correcting errors. Adjustments are necessary if employees received the wrong pay in a prior paycheck or no pay at all.

When and why are payroll adjustments necessary?

It’s essential that employee pay and payroll records remain accurate and up to date. Any mistakes in how much employees are paid, even if quickly corrected, can lower employee morale. Furthermore, many federal, state, and local government agencies require employers to keep accurate and complete records and maintain them for years. These records may be crucial for paying taxes, showing compliance with employment law, and defending against wage-and-hour claims made by employees or former employees.

The HR department should expect frequent changes in employee compensation and be prepared to make prompt payroll adjustments.

Factors that can affect payroll adjustment

A variety of circumstances can create the need for a pay or salary adjustment. Some are routine, and others are one-time events. These factors can be internal to the company, as in promotions, salary increase, or the need to reduce wages to prevent layoffs. Or they can be due to external forces, such as changes in tax rates. For example:

• Changes in government regulations. You’ll need to make payroll adjustments for any changes in laws concerning local and/or federal minimum wage, how employees are classified as exempt or nonexempt, when overtime must be paid, and how workers are classified as employees vs. independent contractors.
• Changes in wages, salaries, and pay rate. Every salary and/or wage adjustment requires employee pay adjustments. These can involve increases and decreases due to promotions, demotions, job changes, merit raises, annual raises, or anything else that affects employee pay.
• Changes in employee classification. Adjustments are needed when an employee moves from a nonexempt job to one that is exempt or vice-versa.
• Changes in employee benefits. Compensation adjustment is needed when employees choose different benefits, such as changing their health care plans. This also applies when employers change the benefits they offer, or when the benefit providers change their costs.
• Changes in tax laws. When tax rates change, payroll adjustments must be made promptly.

How to make a payroll adjustment

Making payroll adjustments requires several steps, all of which should be done with 100% accuracy. Unfortunately, it’s easy to make calculation mistakes if you run payroll manually. Using a payroll software or service provider can help you avoid these types of errors. In addition, having set procedures in place for making payroll adjustments can prevent you from overlooking anything.

Either way, steps include:

• Notifying employees in advance and communicating with them about any payroll changes.
• Updating employee records, including pay stubs and the employer’s paper or digital records.
• Calculating the adjusted pay.
• Informing your payroll service providers.
• Checking for errors and inconsistencies.
• Ensuring compliance with applicable laws and regulations, including overtime rules and the correct classification of exempt and nonexempt employees.

Payroll changes can occur frequently in any organization. The HR department can contribute significantly to the smooth operation of the company by ensuring procedures are followed to make adjustments quickly and accurately.

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1 BLS Employment Cost Index, March 2023