Although discrete business responsibilities often blur out the importance of payroll tasks, it is integral for effective business execution. Minor payroll setbacks can affect businesses at every level, eroding employee and customer trust in the organization. Payroll may seem like a task only involving employee salary payments on time. But, it requires traversing through a labyrinth of tax regulations and legal formalities. Avoiding any of these legal reforms or misjudging the requirements of the regulations can lead to severe business penalties and considerably steep fines. This article will discuss third-party payroll mistakes and how to avoid them.

10 Third-Party Payroll Mistakes to Avoid

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With so many variables, it is not hard for several mistakes to seep into the system. These small and simple errors end up making the system insignificant and lead to various administrative issues such as non-compliance, missed tax deadlines, and delayed pays. Therefore, the 10 third-party payroll mistakes to avoid are-

  1. Incorrect Classification

Incorrect employee classification is seriously audited by the tax department. When various types of employees work for your organization such as temp-staff, part-time employees, full-time employees, or contractors, understand that there are separate legal requirements for each of them.

Showing full-time employees are contractors may save you from some tax liabilities but it can lead to audit issues as well.

Carefully training your payroll team to classify based on the functioning of the employee in the company is the correct way to mitigate this third-party payroll mistake.

  1. Missed Tax Deadline

It goes without saying that missed tax deadlines result in penalties. Delay in processing and submitting payroll taxes and business reports will attract heavy penalties for you sooner than later. Agreeably, your accountant or payroll team may be weighed down by various tasks but these deadlines should never be missed.

Hence, fulfilling the tax requirements 10-15 days prior to the last day can be an effective step towards reducing the chances of tax-related implications.

  1. Confidentiality Breach

Everyone knows the salary of everyone else!

When the payroll of your business is an open book, it may be seen as a strong transparency move. But, in reality, it is a grave mistake for two reasons.

Firstly, knowing the salary of other employees create disruptions among your staff as the feeling of inequality and injustice might increase. Your employees may not understand why a certain person receives a certain salary. It is decided by HR based on various factors. Zero confidentiality in payroll leads to multiple glitches in the system.

Secondly, transparency in payroll means letting your employees know how much money you make, which is never good.

Full confidentiality should be maintained with a proper security structure and company policies.

  1. Poor Data Management

Inefficient data management involves missed payroll dates, wrong employee information, and incorrect salary bifurcation or tax division. All these data inconsistencies cause businesses a lot of money and resources. Correcting mistakes contributes to unnecessary spending and resource wastage.

Utilize a payroll software or outsourcing partner that offers proper management and consistency of employee and company data.

  1. Delayed Payroll

Various factors contribute to the delay in payrolls such as lack of proper timesheets, reports, or funds. All this requires proper management of software and processes being utilized. The employees should have the means to modify basic information. The HR team should have updated accounts, timesheet, and reports before the payroll dispatch date. Most importantly, clear policies or methods should be devised to receive timely payments so that payroll can be handled in a timely manner. The last point is especially true for small businesses.

  1. Ignoring Bank Holidays

If you are handing out payroll cheques to be deposited to the bank on a certain date, then don't overlook the bank holidays. If the cheque date is falling on a bank holiday, payroll deposits might lapse or not go through at all. Hence, in this case, the payroll should be shifted up or down accordingly and the employees should be informed of the same.

  1. Improper Onboarding

During onboarding, it is common to miss a few legal or business formalities. Then, the HR would delay the payroll payment of this employee due to lack of information. While this is a common scenario for the HR team, it should not happen in the first place. At the time of onboarding, complete updated information should be collected from the employee to avoid future delays.

  1. Inefficient Recruitment Strategy

It is common for employers to hire a payroll team with strong numeracy knowledge. Undoubtedly, that is important but so are employees who have knowledge of peripheral duties. Hence, develop a team with both mathematical and strategic knowledge.

  1. Lack of Backup and Recovery

Lack of backup and recovery can cripple your payroll department. With no data to work on, it is not possible to dispatch salaries, manage taxes, or work as planned. It may take days to recover this data if the backup is missing, which will trigger delays in payroll and taxes. Hence, subsequent compliance implications.

The right purchase software or services to store data remotely on the cloud can reduce data loss third-party payroll mistake

  1. Compliance Issues

Compliance landscape shifts regularly. Keeping pace with these shifts allow businesses to reduce fines. Take GDPR, for instance. Many organizations required months just to understand why every country needs to implement it even though GDPR is an EU directive.

This third-party payroll mistake can be mitigated with a software and a proper payroll team to monitor changes in the compliance landscape.


Completely eliminating third-party payroll mistakes or errors any other system of the organization is inevitable. However, most of the above mistakes are avoidable or at least manageable (to avoid severe damage) with proper understanding. Giving extra focus to the payroll management paired with an efficient team can mitigate the above risks.

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