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How payroll providers can help their customers avoid payroll miscalculations
Payroll is often one of the most significant expenses for a business. Also, payroll calculations are complex and messy. And only some business owners or business leaders have an accounting degree or have Uncle James, who works in taxes and gives sound advice on calculating payroll and everything that goes into it. Hence, many organizations prefer a payroll provider to assist them with payroll calculations.
Why are payroll calculations so complex
Any company considering adding payroll-providing services to their venue should consider all aspects of payroll calculations. When calculating payroll, businesses and business owners are required to factor in more than just the punches ins and punches outs of their employees. It encompasses:
- Timecard punches – including breaks and lunch times
- OT regulations – including different state requirements
- Employee classification – including full-time, part-time, salary, and contract
- Tax categories – including 150 reporting agencies with ever-changing rules
For example:
Robert worked 45 hours, is classified as a full-time employee, makes X amount an hour, has requested additional taxes withheld, has a child support garnishment, and is in tax jurisdiction “Y” – What should his check look like?
Hence why the process of making the calculations is complex and sometimes confusing. It includes many factors that need added or subtracted to the pay – and is very open to mistakes.
What are the real costs of payroll mistakes
Some may say, “So what if a mistake is made here or there? It’s not a big deal”. But this isn’t the case. It is important to realize that the cost is higher than just one minute fine or an employee needing to wait a week to get a pay adjustment.
When payroll taxes are inaccurate, business owners lose valuable time as they undergo long hours with costly accounting chores to double-check or recalculate errors. Moreover, the price tag only goes up after the IRS sends notices that normally include penalties and fines. According to the IRS, the problem is so significant that up to 40% of small to medium-sized businesses pay an average payroll penalty of $845 each year.
How can that happen?
A misclassified employee can cost an unfiled W-2 fee of $50, 100% of the matching FICA payment, an additional 40% of the employee’s part in FICA, and another 1.5% of the misclassified salary and interest on the whole worker’s wages.
Additional costs from an incorrect paycheck can derive from employee relations. Not only are businesses legally obliged to pay correct wages for work done, but they are also morally obligated to do so. Maintaining employee trust and engagement is vital, and accurate employee paychecks will make or break this.
The American Payroll Association has found that 49% of employees who experience two paycheck miscalculations are more likely to leave a company. And with the average cost of replacing an employee running up to 33% of that worker’s annual salary, adding on unnecessary expensive recruitment expenses is not something companies want to deal with.
Also, an inaccurate calculation can negatively affect business analytics. Due to the importance of information that can be collected from payroll and analyzed, if miscalculations compromise that information, key input around job costing or employee management is diminished. Therefore, identifying and emulating the most profitable employees or making informed project bidding is much more challenging.
So, when payroll systems fail, the price tag goes up with every mistake. It is easy as a payroll provider to point out the benefits for a company to work with you.
How payroll providers can help businesses with accurate payroll calculations
Understanding the cost of mistakes is the first step when helping businesses and business owners with payroll challenges. The next step is understanding how miscalculations happen and how they can be prevented with effective payroll software.
Most miscalculations are caused by human error. The room for mistakes is large for those still performing payroll manually since people are prone to distractions or fatigue. The same troubles can also affect those working with a system while they are performing data input, such as misclassifying an employee, failing to verify their SSN, or incorrectly reporting tips which can very much be “garbage in, garbage out” type of errors.
For many tax calculations, payroll software can perform all the calculations for the employee’s deductions, benefits, and garnishments for the business owner, but to best guarantee fewer errors, a payroll provider will want to consider the following:
- A well-designed UI – this not only reduces users submitting incorrect payroll but also helps make the process of payroll seamless and easy to perform, so that needless setting errors or typos that people are prone to make is avoided.
- A payroll app – that tracks hours, schedules, and services performed saves businesses time while reducing the risk of mistakes and errors in data transfer. The American Payroll Association found that organizations using software with both timekeeping and payroll capabilities were 44% more likely to have a low rate of payroll errors.
- Automated updating – so that when changes occur, the system notifies the employer of the changes and makes the proper adjustments to stay compliant.
It’s also important that when building a SMB platform for payroll, you take into account the understanding of what mistakes “non-experts” are most likely to make. Not everyone has an accounting degree or had multiple years of training in payroll processing and withholding inputs. Preparing for the common miscalculations or false assumptions that the novice may make and putting a failsafe to support them will lessen costly errors.
Here, years of experience with the process is a huge advantage. In addition, a payroll provider that offers continued customer support will give clients the safety net they would need to prevent further errors. This allows businesses to ask questions, get advice and make a connection to a network of accounting professionals who have likely seen it all and stay in-the-know with everything payroll.
Key takeaway
Payroll miscalculations are such a common problem that many companies anticipate payroll failure and factor it into their yearly budget. As a payroll provider, you are in a great position to improve your bottom line. Now it may be close to impossible to offer 100% accuracy but staying informed of all the ways to keep the numbers right is a good start. Just know you don’t have to do it alone. We can help.
Learn more about Embedded Payroll
Download the The Embedded Payroll Stack eBook and the Payroll Beyond the Paycheck White Paper.
