10 Most Common Payroll Errors And Expert Tips To Avoid Them
Payroll is fiddly and there’s little to no margin for error. Without good payroll management, it’s easy to make costly mistakes that can result in disgruntled employees, fines and penalties, and reputational damage.
For example, research from EY found that on average each payroll error costs organizations $291 to remedy directly and indirectly.
To help ensure an error-free process as possible, here are 10 common payroll errors and some best practices for avoiding them.
10 Most Common Payroll Errors
Here are some common payroll errors to watch out for:
1. Incorrect employee information
Quite basic but mistakes in employee names, addresses, Social Security numbers, or bank account details can lead to issues with direct deposits, tax reporting, and overall payroll accuracy.
This is something to watch for, particularly if you are doing payroll yourself on top of other duties.
2. Employee misclassification errors
When employers misclassify employees, they fail to correctly determine whether a worker is an employee or an independent contractor.
This distinction is critical because it affects how taxes are withheld and paid, eligibility for overtime and benefits, and compliance with labor laws.
Some common misclassifications to look out for:
- Exempt employees misclassified as non-exempt: Exempt employees are usually salaried and not entitled to overtime pay. Misclassifying an exempt employee as non-exempt can result in unnecessary overtime payments.
- Non-exempt employees misclassified as exempt: This is more problematic, as it leads to non-payment of overtime, violating the Fair Labor Standards Act (FLSA), and resulting in potential lawsuits and penalties.
- Independent contractors misclassified as employees: Businesses sometimes incorrectly treat contractors as employees, leading to unnecessary tax withholdings and benefits.
- Employee misclassified as an independent contractor: More commonly, employees are misclassified as contractors to avoid paying benefits, taxes, and compliance with labor laws. As FedEx discovered, this can lead to significant legal and financial repercussions.
3. Wage calculation mistakes
Errors in calculating wages, overtime, or deductions can result in underpayment or overpayment of employees—neither of which is ideal.
Calculation mistakes in payroll can occur at various stages and for multiple reasons. Here's a detailed breakdown of common calculation mistakes:
- Hourly rate errors
- Hours/days worked errors
- Failure to accurately calculate overtime (remember, things like working through breaks count)
- Incorrect overtime rate or period
- Incorrect tax withholdings
- Unapplied pay rate changes (common)
- Incorrect benefits calculations and deductions
- Failing to correctly apply shift differentials
- Currency conversion errors.
4. Not reporting all forms of taxable employee compensation
It’s easy to forget that pay comprises more than salaries, wages, salaries, bonuses, and commissions. Some other forms of compensation that must be reported to the IRS include:
- Fringe benefits: Non-cash benefits, such as company cars, gym memberships, or housing allowances, should be included as taxable income if they do not qualify for specific exemptions.
- Stock options: The value of stock options granted to employees, when exercised, must be reported as taxable income.
- Reimbursed expenses: Reimbursements for personal expenses, if not properly documented as business expenses, should be reported as taxable income.
- Gift cards and prizes: Non-cash awards such as gift cards, prizes, or awards given to employees are taxable and must be reported.
- Severance pay: Payments made to employees upon termination, including severance pay and accrued vacation payouts, should be included in taxable income.
- Tips and gratuities: For employees who receive tips, such as in the hospitality industry, these must be reported and taxed appropriately.
- Allowances: Any allowances provided to employees, such as for meals or travel, should be included in taxable income unless they meet specific non-taxable criteria.
5. Non-compliance with state and local laws
Some states and localities have specific payroll regulations that differ from federal regulations.
Here are some common areas where non-compliance with state and local laws can cause issues:
- Minimum wage laws: Many states and localities have minimum wage rates that are higher than the federal minimum wage. Employers must pay the highest applicable rate. Failing to do so can lead to wage claims and penalties.
- Overtime regulations: State laws may have different criteria for overtime eligibility and rates. Some states require overtime pay for hours worked beyond eight in a day, not just 40 in a week. Ignoring these rules can result in underpayment and legal action.
- Paid sick leave: Several states and municipalities mandate paid sick leave for employees. These laws vary in terms of accrual rates, usage, and carryover provisions. Not providing the required sick leave can lead to fines and employee complaints.
- Paid family and medical leave: Some states have their own family and medical leave programs, which may offer benefits beyond those provided by the federal Family and Medical Leave Act (FMLA). Employers must adhere to these programs to avoid penalties.
- Rest and meal breaks: State laws may require specific rest and meal breaks for employees. For example, California requires a 30-minute meal break for every five hours worked and a 10-minute rest break for every four hours worked. Non-compliance can lead to wage claims and penalties.
- Final paychecks: States have different requirements for when final paychecks must be issued after an employee is terminated or resigns. Delays or failures in providing final paychecks can result in fines and penalties.
6. Duplicate payments
Duplicate payments occur when an employee is paid more than once for the same pay period, often due to manual entry errors, unsynced systems, or repeated payment submissions in payroll software.
Overpayments can create cash flow issues, distort financial records, and lead to compliance risks if not corrected promptly.
Recovering the excess funds can also be awkward or difficult—especially if the employee has already spent the money!
7. Late or missed payroll run
This happens when employees are not paid on the expected payday due to missed deadlines, processing errors, bank holidays, or technical issues with payroll systems or bank transfers.
Late payroll damages employee trust, violates labor laws (in many jurisdictions), and can trigger penalties from regulatory bodies. For employees living paycheck to paycheck, even a short delay can cause financial hardship.
8. Improper final paycheck processing
Final paychecks can get tricky—especially if you’re rushing to process a termination or missed a detail during offboarding.
Forgetting to pay out unused vacation time, applying the wrong deductions, or missing state-mandated deadlines can lead to legal trouble or a frustrated former employee.
Many states have strict timelines for issuing final pay—some require same-day payment upon termination.
9. Inaccurate record keeping
Poor or inaccurate record-keeping can lead to discrepancies during audits by tax authorities or labor departments (as well as internal payroll audits) and issues with tax filings.
One of the biggest pros of outsourcing your payroll processing altogether is that record keeping becomes someone else's problem!
10. Missing reporting deadlines
Missing payroll reporting deadlines is a common but serious error that can lead to penalties and compliance issues.
Employers are responsible for filing a range of federal, state, and local forms—such as quarterly Form 941 for payroll taxes, annual Form 940 for FUTA, and year-end forms like W-2s, W-3s, and 1099s—each with strict due dates.
Many of these deadlines fall in January or at the end of each quarter, and missing them can trigger fines from the IRS or state agencies
To stay compliant, it’s essential to maintain a payroll calendar with all filing deadlines and ensure your payroll system or provider supports timely submissions.
How To Avoid Payroll Errors: 18 Best Practices
As you can see, there’s quite a lot to keep track of to successfully manage payroll. Use these best practices to help minimize errors and build a resilient payroll process.
1. Document payroll procedures
As Andrew Lokenauth, Fractional CFO and financial adviser, highlights: “Documentation is everything. My team maintains detailed process docs for each client's unique payroll requirements—think garnishment orders, special deductions, and union agreements.”
Having your payroll procedures clearly documented alongside a payroll checklist makes the whole process smoother, more consistent, and easier to scale.
It helps ensure that anyone handling payroll—whether your regular admin or a backup—knows exactly what steps to follow, from collecting timesheets to submitting tax filings.
Plus, if errors happen or questions come up, a well-documented process gives you something concrete to review and improve.
It's important to update these documents as your company grows. Doing payroll for one employee looks much different from processing payroll for 10, 50, 100, or 1000 employees monthly.
2. Establish clear payroll policies
Clear, well-documented payroll policies help ensure that payroll is processed consistently, fairly, and in compliance with laws and internal expectations.
When employees and managers understand how things like overtime, bonuses, time tracking, and leave affect their pay, it reduces confusion, payroll disputes, and the burden on your HR or payroll team.
These policies also serve as a reference point for handling exceptions or edge cases, and they help onboard new payroll staff more smoothly by clearly outlining standard procedures.
Tip: Keep your payroll policies easily accessible (e.g. your employee handbook or HR portal), and review them at least once a year to ensure they reflect current laws and company practices.
3. Maintain accurate employee records
Even though it seems fundamental, many payroll errors stem directly from outdated or incomplete employee records.
This reinforces the need for regular reviews, version control, and cross-team coordination between HR and payroll.
The beauty of using technology such as payroll software is that many vendors have an employee self-service portal where they can update their information such as bank account details.
Good payroll systems integrate with other applications such as HRIS and time tracking software to decrease manual data entry and ensure accurate records.
4. Automate as much as possible
As Katrina Magdol, Founder of Amalou Consulting, suggests, “My advice is to automate as much of the process as you can. Start from onboarding by automating the completion and secure storage of your employees' payroll forms. When it comes to employee changes, do the same.
For example, do you have an employee with a new pay rate? To ensure their pay is processed accurately, find a way to enter a reminder or flag within your system as soon as the pay rate change is approved.
You can and should use other technologies as well. For example, utilize your calendar to proactively set aside time to process payroll and set recurring meeting invitations that match your payroll schedule, inviting everyone who has responsibility to input, review, approve, and submit payroll.”
Investing in payroll software can save time and increase accuracy by automating calculations and staying updated with the latest tax rates and regulatory changes. To help, here are some key payroll software features.
5. Stay updated on regulations
Regularly update your knowledge of local, state, and federal tax laws and employment regulations.
This includes understanding changes in tax rates, minimum wage laws, overtime rules, and benefits regulations.
There a few ways to do this:
Subscribe to official government updates
- Sign up for newsletters like IRS Tax Tips or the Payroll Industry e-News.
- Follow updates from dol.gov for wage and hour law changes (like FLSA updates).
- Most states have their own labor department or tax agency email alerts or RSS feeds.
Tip: Bookmark your state’s Department of Revenue and Department of Labor websites and check them quarterly.
Follow trusted payroll news sources
- Sites like SHRM, Bloomberg Tax, ADP Spark, and APA (American Payroll Association) offer timely updates, webinars, and compliance guides.
- Payroll software providers often maintain blogs or knowledge centers with regulatory news and system updates.
Tip: Set up Google Alerts for terms like “payroll tax changes [your state]” or “minimum wage 2025.”
Join professional organizations
- Groups like the American Payroll Association (APA) provide newsletters, certifications, workshops, and state-specific updates.
- Local payroll or HR associations may also host events or send timely alerts on changes affecting your region.
Build a relationship with a payroll provider or consultant
- Payroll providers like Gusto, ADP, or Paychex offer compliance support, alerts, and legal updates built into their platforms.
- If you use an external accountant or HR consultant, ask them to flag relevant regulatory changes for you.
Tip: Use payroll software with built-in tax updates and compliance tracking to reduce manual monitoring.
6. Create a dedicated folder for each pay date
As Eric Mochnacz, Operations Director at Red Clover HR, advises “With the way people communicate asynchronously nowadays, it's easy for payroll updates and changes to fall through the cracks.
So, one way to make sure that doesn't happen is by maintaining folders for each pay date. When you receive any information about change in pay rates, deduction changes, supplemental pay or any other things that need to be reflected in payroll - save it to that folder.
That way, during payroll processing, you can check if each item has been updated appropriately before you run payroll.”
Keeping a dedicated folder for each payroll run helps you stay organized and makes audits or issue resolution much easier.
7. Have a payroll contingency plan
Things happen—people get sick, systems crash, banks have outages. That’s why it’s smart to have a backup plan in place for payroll.
This could mean having a secondary payroll processor trained and ready, identifying who can step in to approve payments, securing access to emergency funds, and keeping a payroll checklist handy so nothing gets missed under pressure.
Planning ahead means your team gets paid on time, even if something unexpected pops up.
8. Require written verification for any pay rate changes
Requiring written verification for any pay rate changes helps ensure there's a clear, documented agreement between the employee and the company.
As Anderson highlights “These can be forms sent to you or utilizing your payroll system’s automated Change Forms that update your system upon approval(s)."
9. Regular audits and reconciliation
While you don’t need to do a full audit after every payroll run, it’s smart to build in a light review or “mini audit” as part of your regular payroll process.
This quick check might include:
- Verifying that totals match expected payroll costs
- Reviewing a few employee pay records for accuracy (especially new hires or off-cycle adjustments)
- Ensuring taxes and deductions look right
- Confirming any changes (raises, PTO payouts, bonuses) were processed correctly.
Then, schedule deeper payroll audits quarterly or annually, where you review compliance, classifications, and recordkeeping in more detail.
As a minimum, Anderson recommends monthly spot-checking deductions, tax withholdings, and hours worked and then auditing pay rate changes, PTO accruals, and general ledger accuracy every quarter.
Ideally, payroll audits should also include a review of all special circumstances, like payroll garnishment calculations, to verify that all deductions comply with court orders or legal requirements.
Tip: Automate what you can (like flagging anomalies or threshold alerts), but always pair it with a final human review before each payroll is finalized.
10. Double up
As Magdol suggests “Design the process in a way that requires (at least) two different people to fully review the preview (or preprocess register) before it is submitted. Having two people review the full details is one of the most effective ways to avoid errors and prevent fraud.”
11. Sync calendars
Kimberly DeCarrera, Fractional CFO, Springboard Legal suggests syncing payroll and personal calendars:
“It’s a good idea to take the calendar from your payroll software and download it into your own calendar—from the individual payroll dates and when you need it submitted to when payroll tax payments and reports are due.
Having the payroll calendar in your main work calendar (Microsoft Outlook, Google Workspace, etc) helps a payroll or accounting manager stay on top of all the various deadlines and reminders.”
12. Don’t neglect the humble payroll register
As Mochnacz reminds us, “I think people forget what a valuable tool the payroll register is.
When run and reviewed before hitting submit, it's your final checkpoint to ensure that everyone is getting paid correctly and you aren't missing any critical deductions, and changes you made from the documents in the payroll folder are reflected appropriately.”
Tip: Keep each payroll register securely filed (physically or digitally) for at least 3–4 years to support compliance and historical reviews.
13. Clear communication with employees
Maintain open lines of communication regarding payroll policies and changes, provide clear, detailed pay stubs, and be available to answer employee queries about their pay.
Mistakes happen. When they do, explain what happened and work with them on what you can do to resolve it.
14. Prepare for year-end processing early
As Lokenauth warns, “Never rush year-end processing. I block out 3x more time than I think I need. December's always crazy with W-2 prep, bonus calculations, and benefit changes. Plus, there's always some last-minute drama with employees wanting to adjust their withholdings.”
So start the year-end payroll process well in advance. This includes verifying employee information, updating payroll records, and preparing for tax document distribution.
15. Provide training
Regular training helps your team stay current with legal changes and use payroll tools to their full potential.
To approach this effectively, start with foundational training on core concepts like pay cycles, deductions, and timekeeping.
From there, offer hands-on sessions for your payroll software and keep the team updated on regulatory changes through webinars, newsletters, or internal briefings.
As Lokenauth suggests, “Training is crucial, but not the boring kind. I create scenario-based workshops for my clients' payroll teams. We work through real-world examples like multi-state taxation issues and mid-year benefit changes. The hands-on practice makes a huge difference."
16. Seek professional advice
When in doubt, consult with payroll experts or legal advisors, especially for complex issues or major changes in payroll laws and practices.
If it’s all a bit too much, there are many payroll companies out there that can manage the process for you.
17. Slow down
Take your process at a steady pace so you catch your own mistakes. As a wise person once said, "You can be the hare with ten mistakes, or the turtle with zero mistakes."
18. Seek employee input
As Malcolm Ferrante, senior accountant at CBS Group, highlights,
“Seeking employee input can also shed light on pain points and highlight opportunities for improvement.”
Payroll Errors FAQs
What’s the margin for error on payroll?
With the right audits and protections in place, an acceptable margin is ~2%. Anything more and you should look for patterns and training opportunities.
Does an employer have to correct payroll errors within a certain amount of time?
Yes, employers are required to correct payroll errors, and the timing depends on federal and state laws. Under the Fair Labor Standards Act (FLSA), underpayments must be corrected promptly—typically by the next regular payday.
Some states, like California and New York, have stricter rules requiring immediate correction or payment by the next scheduled payroll.
Overpayments can also be recouped, but often require employee consent and must follow specific rules.
Which payroll errors present the biggest legal risk for organizations?
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- Misclassifying employees: Treating employees as independent contractors can lead to back taxes, penalties, and lawsuits.
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- Incorrect or unpaid overtime: Failing to pay eligible employees the correct overtime rate violates wage laws and often results in legal action.
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- Late or missing payroll tax filings: Missing tax deadlines can trigger steep IRS penalties and personal liability for business owners.
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- Improper final paycheck processing: Not paying final wages or unused PTO on time may violate state laws and lead to fines or wage claims.
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- Poor payroll recordkeeping: Incomplete or missing records make it difficult to defend against audits or employee disputes and may violate labor regulations.
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