Did you know that 40% of small and medium businesses experience penalties due to payroll errors? Payroll mistakes are more common than we imagine. If you would tap into your entrepreneur network right now or post on LinkedIn asking about payroll errors of others, many business owners will revert to your grief. Just because you have a smaller ratio of employees or most of your employees are part-time or remote workers, that doesn’t make you immune to common payroll mistakes. We once connected with our favourite business partner, and he told us this: “When I finally hired an accountant to look after my taxes, books, and accounts, I found that my payroll tax payments were not being made. I had assumed that the bank would automatically withhold this amount. I have never been more devasted in my entire career. We had to pay off a huge amount to correct our errors.” This brings us to a two-fold conclusion:
  • Many businesses make payroll mistakes.
  • The reason behind this is that they are not fully equipped to handle the situation.
So, in this article, we will explore common payroll mistakes and then move on to finding possible solutions to the situation.

Some Expensive Payroll Mistakes

Most of the payroll mistakes cost you a lot of money. Through our experience and industry knowledge, we have found the most common payroll errors. Let’s have a look:

1. Late Payroll Taxes

As an employer, you have to pay employment taxes on a regular basis. Whether you are hiring full-time or part-time employees, employment taxes can’t be missed. Deduct TDS from employees’ salaries every month and pay taxes on time to avoid penalties.

However, while this sounds simpler here, it is hard to manage. There are various clauses and rules applied, so check the official document for such taxes to avoid mistakes.

2. Improper Classification

There are an array of mistakes in employee classification. Here are the following payroll mistakes:

      • An exempt employee is classified as non-exempt
      • An employee who is classified as a contractor

For example, a freelance writer would be your contractor, not your employee. Similarly, your hourly workers are non-exempt.

If you are making these classification errors on purpose, then penalties implicated are much more severe than an innocent mistake. So, obviously, you should not misclassify employees for any purpose. If that happens by mistake, then correct your mistake immediately to reduce the penalty amount.

3. Overtime Miscalculation

Unless you are working with a contractor on a project basis, you need to record and compensate your employees’ overtime. Ideally, under Section 59 of the Factories Act, you will find that you need to pay overtime twice the rate of the employment. Considering all such laws, you need to record and appropriately dispatch the payroll of employees.

4. Unorganized Records

If we are afraid of one thing, then that is an audit. We all fear that an audit will be set up, and we would then have to pay too much penalty. To avoid any implications and issues during the audit or to eliminate the audit altogether, you need organized records. If you are still struggling to maintain paper records or excel sheets, then it is time to use payroll software.

Implications and Costs of Common Payroll Mistakes

We have already discussed some common payroll mistakes above. But, what are the implications of these payroll errors?

The impact of payroll errors is always seen in two ways: cost and reputation.

Let’s start exploring the cost of common payroll mistakes:

      • When you miscalculate the work hours or taxes of the company or employees, you disrupt the budget of your business.
      • Paper records always lead to hassle; you can easily lose paper records. When that happens, your books and timesheet are a mess.
      • Again, miscalculating the payroll of employees is not only harmful to your budget but also compliance structure. At any time, you can face compliance penalties.
      • The extra time spent on correcting payroll errors leads to additional working hours, which means more money.

Apart from the money, another thing that impacts your business badly is the reputational loss.

According to this study, most people live off their paycheque. This means that most of your employees can only pay their bills once you pay their salary. Considering this scenario, delaying employee salary means a major hassle to them. For you, it may be a week late, but for the employee, their mortgage payment, car loan installment, and credit card bills are delayed. Now, that doesn’t have a great impact on the employee.

In fact, if you look at it, then there’s a long-term negative impact associated with this.

For example, when an employee fails to pay their mortgage, their bounced cheque is negatively recorded in the credit report. Further, the penalty of late payment is also incurred by the employee.

As a result, when you are unable to function on time, your employees are unable to pay their bills on time, which encourages them to look for a new, more stable employer.

When you are executing payroll or selecting a payroll service partner, you need to consider the significance paycheque has on the lives of employees. You are literally contributing to the smooth functioning of your employees. Hence, you need a reliable payroll outsourcing partner, such as Paysquare.

Valuable Practices to Avoid Payroll Mistakes

In between your manual processing struggle, take a step back and adopt these best practices to correct payroll errors. With appropriate payroll processes and structure, businesses are able to maintain compliance and accuracy.

Have a glimpse at the factors that define the outcome of your entire payroll process:


Communication is necessary for every section of your business to maintain a good flow of information. In payroll, too, you need smooth communication from HR to the information system, other HR employees, accountants, bookkeepers, and employees.

For instance, your HR should be able to clearly help an employee understand why a certain pay bifurcation structure is utilized and what it means.


Properly classify every employee of your organization, based on which you can pay taxes, select structure, and decide overtime requirements.

      • Temporary employees
      • Full-time employees
      • Part-time employees
      • Consultants
      • Independent contractors

Paperless Processing

We have already discussed that paper-based systems are unstable. You can suffer theft, your papers can get lost, or a disaster can take it all away. You need to digitally store your records to restore them immediately in certain situations.

Hence, there’s an urgent need to move from paper-based to paperless payroll processes. It is informational, quick, simpler, and reliable.


Perform regular audits to ensure that your payroll department is functioning properly. From time to time, maximize your efficiency by understanding your automation and other requirements.


The best practice that we can vouch for is outsourcing payroll processes. Here’s what you can outsource:

      • Payroll calculations
      • Tax deductions
      • Tax payments
      • Report generation
      • Real-time analysis

This will help you gain the following benefits:

      • Cost-effectiveness
      • Accuracy
      • Reliability
      • Less hassle
      • Time-effectiveness

How To Find a Payroll Service Provider?

Before we discuss outsourcing or hiring a payroll provider to correct common payroll mistakes, understand whether you need one or not.

Every business has varied requirements, so ask yourself: “How much time am I spending on the payroll?”

When you are able to accurately answer the question, convert your payroll hours to the resources and money spent. Once you do that, add to this the following:

Am I able to dispatch payroll on time?

How frequently are we making a mistake?

How much are we giving to compliance penalties?

Adding these costs and hassles will help you understand your payroll. Since it is an important section of your business, it is obvious that you need to streamline payroll. Therefore, you need a payroll outsourcing partner.

Here are some tips for finding the best payroll outsourcing provider like Paysqaure. As an organization serving the industry for decades now, we are equipped to offer you accuracy, reliability, and flexibility.

      • Firstly, understand your requirements.
      • Based on the above, find providers that can help you.
      • Understand the package offered along with the costs.
      • Compare these costs with other providers, including factors like services offered.
      • Check online reviews of the provider, such as Facebook and Google ratings.
      • Call their support and understand how well they serve users.


Payroll mistakes are common but taxing. Since these payroll errors usually go unnoticed, you are often unaware of the damage that has been made. As a result, the implications of these mistakes grow slowly and then shocks your business finally. To avoid these situations, check the above methods to overcome common payroll mistakes. You can hire an outsourcing payroll partner to smoothly calculate and dispatch payments every month. Remember to use the above tips to find the best provider for your business. If you don’t want to go through all this hassle, check the services offered by Paysquare. We have been in the industry long enough to develop personalized payroll outsourcing packages for every type of user dedicatedly. Visit our website and know more.

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