How do you ensure accuracy in payroll?
Payroll can be confusing and laborious. Because of that, payroll errors can easily spring up. They can creep into your payroll process with little notice.
Payroll involves employees’ wages, governments’ taxes, and employment laws. You must keep an accurate payroll; otherwise, you might face back payments, penalties, and interest.
To maintain an accurate payroll, use the following tips.
1. Classify workers correctly
You must accurately classify your workers as either employees or independent contractors. This classification is not arbitrary and is extremely important.
With employees, you need to collect and pay taxes, pay overtime wages, and follow minimum wage laws. These things are not necessary for independent contractors. Contractors pay their own taxes, don’t earn overtime wages, and they set and negotiate their rates.
To determine if a worker is an employee or contractor, use the three-prong test from the IRS. You will look at behavioral control, financial control, and your relationship with the worker. If you still need help classifying the worker, you can file Form SS-8 with the IRS.
As a note, your state might have additional determination requirements. Check with your state department of labor to find out if there are any other rules you should follow when classifying employees.
If you classify a worker incorrectly, you could owe back wages and taxes, interest, and penalties. You need to have employees in your payroll system. Independent contractors should not be on your payroll.
2. Automate your payroll
If you use a manual payroll system, you can end up with a lot of mistakes. You might punch the wrong number into the calculator, record a number in the wrong spot, or forget to include something in the payroll process.
Automating payroll can reduce the chance of errors. To do this, use an online payroll software. The software will calculate pay and taxes. The software should be accurate, so you don’t have to worry about errors sneaking up on you.
3. Track time and attendance
You need to accurately track how much time your employees work. This is especially true for employees who earn hourly wages and employees who are eligible for overtime wages.
You need a way to track time and attendance. Online software is a good option because employees can log into their account and log their start and end times. Because it’s online, even remote employees can use it.
Time and attendance software can also help you prevent time theft. You can review time cards before you run payroll to make sure they are accurate. You can compare them to work schedules and agreements to verify their validity.
4. Keep up with payroll updates
Payroll is ever changing. Governments are always passing new laws. Tax rates and minimum wages often change annually. You need to dedicate some time to keep up with changes.
You can get information from multiple sources. Check news sources that regularly report on payroll-related changes. You can subscribe to newsletters from government sources and niche blogs. Make sure you check your mail for rate notices from your state and local governments. Seek out information from local business organizations.
Sure, keeping up with payroll updates can take a lot of time. But, it’s worth it because you can save time and money in the long run by avoiding errors.
If you use payroll software, the provider should update the software whenever there are changes to standardized tax rates. But, you must still keep up with laws and individual business rates.
5. Conduct payroll audits
You should conduct regular payroll audits to verify that your payroll records are accurate. You might conduct an audit on a quarterly or annual basis.
When you do payroll audits, you make sure that your payroll information is correct. Essentially, you’ll make sure that all the numbers add up and money is going to the right place.
Check employee wages. Make sure they are calculated correctly. Verify that all deductions are withheld at the right time. Check that you calculated your employer taxes correctly.
Input v/s Output validation
Post the preliminary payroll process, match the total number of line items in the source file (the one received from input provider) with the payroll results, by each payroll element. This will ensure you have not missed out data of any employee. Additionally, match the total values of such inputs with the payroll results to ensure the values are entered correctly too.
For example: You have received an input file from the sales department with instruction to pay incentives worth Rs.250,000/- to 200 employees. Once you complete the entry of this data in the payroll system, it should provide a report showing the number of line items as 200 (number of impacted employees) under the wage type “Incentives” & also the total value of the line items should amount to Rs 250,000. This exercise of matching a source data with payroll results is called ‘input v/s output validation’
This was a question raised in a recent article published by learnpayroll, The Learn Centre Ltd. The answer would appear to be – Payroll Accuracy is very important! They refer to a survey put together by SD Worx where 44% of respondents reported they would consider leaving their job if they were paid incorrectly.
The article looks at various questions and the response of employees. There seems to be some variation between countries, and a surprisingly high proportion of employees perceive they have been paid incorrectly in the past. We have not seen the questionnaire and cannot comment on how representative it is, but it is interesting to see the responses and the choice of questions. Payroll accuracy is certainly something that needs considering.
Tax code changes
The most common reason we have questions raised is about changes in employee’s net pay, which is most often due to a tax code change. This may be reported as a payroll inaccuracy, but obviously is in the hands of HMRC, and therefore although the tax code may be wrong it will have been applied correctly.
The employee should have a notice from HMRC before the code is changed, but these notices do not always arrive. Once a code is applied the employee should contact HMRC; we provide the details they need on the payslip.
Payroll Accuracy – The Issues
There are three main areas of opportunity for payroll inaccuracy; preparation errors, processing errors or reporting errors
We would suggest keep the amount of work and information required to a minimum at this stage to help eliminate errors. You should not really need to generate salaries every time if there is no change. If a pay rate, payment or deduction is the same every time why risk a data corruption by reproducing the data outside of the payroll?
Time and attendance systems are worthwhile using for hourly paid staff; make sure you have a system you trust, and manual adjustments can be made if necessary. It is better to send a report directly from the time and attendance software than try and transpose it, although it has to be the correct report.
Make sure you have an audit trail for all changes. If a member of staff has a salary deduction you need to know why, as this could be reported as an error. You should also keep new starter details as provided by your new starter, as they may give you incorrect information.
Instructions should be precise, with adequate unambiguous information, and the employees accurately identified.
Once the payroll information has been prepared the actually processing begins and RTI files, payslips, pension deductions, BACS payments etc are prepared. Data is taken, processed and results in a payroll.
Considerable care should be taken at this stage, as simple human error can again very easily creep in. The information needs to be correctly handled, as the aim is to be compliant with HMRC and The Pension Regulator guidelines.
It is useful if there are checks within the system to make sure everything is compliant, and totals can also be checked against any totals in the preparation information. As many checks as possible at this stage can help eliminate errors before the payroll is returned.
At Payroll Options we have multiple data validation and RTI compliance validation checks. We also process the payroll in parallel with two members of staff, cross checking by computer to help eliminate the opportunity for human error.
If the payroll is processed in house it is useful to have some separation between preparation and processing, and an audit trail should still be maintained.
This is an interesting area, as it would imply the payroll has been processed correctly, the correct information presented to HMRC, but then an issue with the reports. The reports must accurately reflect what has occurred within the payroll, as these will form the basis of financial journals and potentially reporting to pension companies and payments to HMRC.
Consistent reporting is the key here. If the reports are the same every time the payroll is processed, then there should be no opportunity for incorrectly configured reports to be used. It is useful if the reports are presented to someone other than the person processing the payroll.
It is possible to have accurate payroll, but processes must be maintained and all stages must be understood and communicate effectively. There must also be adequate feedback and any issues quickly addressed.