Payroll Compliance for Business Leaders: Common Errors & Best Practices

It’s the start of a new year and no matter what you are feeling — overwhelmed (check), stressed (check), hopeful (check) — it’s time to take a deep breath and consider this a bit of a fresh start. 

No matter how long you’ve been running your business or what time of year it is, digging into payroll compliance with a reliable HR consultant is always a smart idea.

Employment laws and regulations are continually changing, and businesses can easily get stuck if they aren’t on top of the latest changes, or aware of upcoming changes. 

Thank goodness today we have some pretty great payroll software options to make sure that your employees are getting paid quickly and accurately. But, there’s still plenty of room for human error. 

The consequence? Maybe an employee will be a little frustrated and you can compensate them right away, and everything will be fine. Worse, an innocent mistake can lead to fines, legal problems, and IRS tax nightmares.  

Some of the most common errors and problems with payroll that we see have to do with the following: 

• Incorrect employee classification

• Failing to update employee tax information

• Missing tax filing deadlines or having late payments

• Miscalculating overtime or PTO

• Incorrect information being entered into or calculated by payroll system 

Here’s a breakdown of best practices to keep your payroll accurate, efficient, and fully compliant.  

Staying on top of this and keeping things smooth will save you stress in the long-run. 

I’ve seen leaders make too many times so please be proactive when you have questions!

Employee Classification Errors & Overtime 

Should that new hire be a contractor or full-time? What are the pros and cons of full-time versus a contractor? Should that employee be getting OT? 

The key classification considerations that US employers need to consider are whether a person is: 

1. An employee or an independent contractor 

2. Exempt or non-exempt from overtime 

3. Full-time or part-time

Errors can come from the fact that job descriptions and titles aren’t always accurate to what an employee actually does. In addition, regulations around this tend to change often. There can also be discrepancies when it comes to local, state, and federal laws, especially if you have employees in different states or contractors in other countries. 

As far as overtime goes, the Fair Labor Standards Act (FLSA) states that employees are entitled to overtime pay for hours worked over 40 in a week unless they’re exempt from overtime. Missing this can cost your employee important wages, and puts you at risk for FSLA fines. 

OT calculations can also be tricky because laws can be different according to state, other income issues (for instance commissions and tips), and reporting errors.

For the issue of independent contractors, the DOL published a final rule on January 10, 2024 which came into effect on March 11, 2024. See the DOL FAQ page for more information about employees versus independent contractors. 

Misclassification can cost both employees and companies plenty in back taxes, fines, and penalties, so don’t miss this!  

Here’s the link to the DOL Resources for Employers. There’s plenty of great information here but it’s a bit of a yawn… it’s much more fun to talk to one of our friendly HR consultants! 

Automated Payroll Tools & Payroll Staff Management 

There are plenty of automated tools out there which your payroll department already uses, and phew! Gone are the days we had to calculate everything more or less by hand, or even using clunky old-school software. 

But it's still extremely important to have your payroll management team updated with proper SOPs and training to review data and ensure accuracy, as well as be able to counsel employees on all of the issues that can come up. 

And when it comes to artificial intelligence, the jury’s still out. The DOL released some guidelines as of October 2024 which caution against using AI for timekeeping because of the potential for errors leading to violations.  

We also recommend keeping an updated SOP manual for those in charge of payroll, and having backup teams be completely up-to-date on all relevant issues. 

Tax Withholding and Reporting Deadlines

Be sure to comply with tax deadlines and timely reporting at federal, state, and local levels, and make sure all tax forms are updated per current year regulations. 

Federally, tax withholding or reporting errors can only be reported to the IRS in the same year that the wages were paid – at least, for the most part. So they need to be on point from the get-go. This might be affected by changes such as the revised w-4 form.

Employers need to make sure that there is support in place for employees to fill out the forms correctly.  

The IRS has a handy Tax Withholding Estimator which can be a good place to start. 

Wage and Benefits Laws 

Generally speaking there are several key areas that can get tricky when it comes to calculating wages and benefits when it comes to wage and payroll laws. We’re talking about things that can vary between individual employees as well as vary between regions, like:  

• Breaks 

• Sick leave

• PTO

• Vacation time 

• Final paychecks 

• Tax rates 

• Minimum wage 

Sometimes federal and state laws can even conflict, so it’s important that people managing your payroll are fully aware of current regulations at regional, state, and federal levels.   

Benefits are another issue that can get complicated and lead to mistakes if you don't have the right guidance. They include issues to do with:  

• The Affordable Care Act (ACA)

• Workers' Compensation

• Family and Medical Leave Act (FMLA) 

• Social Security 

• Medicare 

• Unemployment Insurance 

Payroll Compliance Check-Up: Mind the Gaps! 

The good news is that you don’t have to navigate this complex process alone. By following payroll best practices, you can streamline your operations, reduce mistakes, and increase overall productivity. Whether you have an expert on your team or you’re managing it in-house,

We don’t need to tell you twice how essential compliance is here to ensure that you protect your business so make sure you are 

• Are you fully compliant with payroll tax and labor laws in all relevant states or international (remote) workers? 

• Are you on top of payroll-related tax credits?

• Have you had frequent turnover among payroll staff?

• Is your payroll manager/team updated on current laws, regulations, and internal procedures?

• If you’re using a third-party provider, are they responsive and timely when you need help?

• Could you benefit from more thorough and accurate recordkeeping? 

Payroll can be time-consuming and inefficient. If you are looking to free up your resources by finding a trusted partner to handle all your time-sensitive payroll issues, our HR consultants are here to help you understand where you might be falling short or missing important gaps. 

*The information and materials on this website are provided for general information purposes only and are not intended to be legal advice. We attempt to provide quality information, the law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature and may not apply to a specific factual or legal circumstance. Nothing on this website is intended to substitute for the advice of an attorney; therefore, if you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.