Payroll Mistakes: How to Spot, Fix, and Avoid Them
Learn how to identify, fix, and prevent common payroll mistakes to avoid compliance risks, ensure accuracy, and improve employer satisfaction.
Payroll Mistakes: How to Spot, Fix, and Avoid Them
Payroll is the lifeblood of any business. The accuracy (or inaccuracy) of payroll data affects more than just employees’ paychecks — it also impacts any downstream application or vendor that relies on that data, from workplace benefits to tax filing. That’s why it’s so important that third-party employment applications are prepared for the reality that payroll mistakes happen. The ability to identify common payroll errors quickly — before they have a negative impact on the employer and employees — is key to client satisfaction.
Below, we explore the most common payroll mistakes employers make and how you can use technology — including payroll APIs — to catch them before they have a negative effect on your business.
Why payroll accuracy matters
If your business relies on collecting employers’ payroll data, then you know it can be challenging to ensure the data you receive is accurate, especially when there are so many pieces to the payroll puzzle — from hours worked to pre- and post-tax deductions, state and local taxes, benefits eligibility criteria, and so on.
While the accuracy of the employers’ payroll data is ultimately their responsibility, receiving bad data from your customers negatively impacts the product or service you provide. Payroll mistakes and their downstream effects compound quickly, with consequences for both your business and your customers that range from financial losses to noncompliance and even potential legal action.
Unfortunately, payroll errors are common. According to our survey of 1,000 employers, 52% reported finding outdated or incorrect information in their employee data at least once per week. This makes it all the more important that you have safeguards and protocols in place to recognize payroll mistakes immediately, since every mistake has some kind of cost — whether it’s a hard cost, lost time, or negative impact on your company’s reputation (or all three).
Common payroll errors
The first step in identifying payroll errors is knowing what to look for. Some payroll errors crop up repeatedly due to the complexity of the information, human error, or employers’ difficulty keeping data up to date across a swath of siloed softwares.
These are just a few of the of the most common sources of payroll data errors:
Incorrect employee classifications
Under the U.S. Fair Labor Standards Act (FLSA), employees are classified as exempt or non-exempt, which determines whether they’re subject to regulations governing things like overtime and minimum wage. Employers also need to classify employees as full- or part-time employees or contractors, which can affect things like the employee’s benefits eligibility and the employers’ tax obligations.
Misclassified employees may be inaccurately marked as eligible or ineligible for benefits and may be taxed inappropriately, which has downstream impacts not just for the employer, but for other applications that impact an employee’s paycheck — like retirement, earned wage access (EWA), ICHRAs, and more.
Miscalculated wages or hours
There are many ways wages can be miscalculated, from improperly logging overtime to poor recordkeeping to mistakenly paying employees on leave.
When you don’t have accurate salary or wage information, benefits might be calculated incorrectly as a downstream impact. A benefit like a 401(k) contribution might be a percentage of an employee’s gross pay, for example. If the gross pay is inaccurate, the 401(k) calculation and subsequent deduction will be wrong.
Inaccurate deductions or contributions
Payroll contributions and payroll deductions are some of the trickiest pieces of the payroll puzzle, especially for benefits where amounts or percentages change from one pay period to the next. Employers also have to manage court-ordered deductions such as child support or garnishments, which impact an employee’s net pay. When deductions are missing or miscalculated, it creates a domino effect in which other deductions may also be miscalculated because they’re now working off an inaccurate net pay figure.
Miscalculated taxes
Payroll taxes can easily be miscalculated if the employer has misclassified an employee, failed to account for a pre-tax deduction or contribution, accidentally input the wrong withholding amount from an employee’s W-2, and so on. Miscalculated taxes have big implications for many downstream products or services that rely on the full payroll picture, like EWA solutions that need to verify the net pay and tax withholdings for each pay period. Otherwise, early wage disbursements could be inaccurate and overdraft payroll.
Consequences of payroll errors
Payroll errors can be complicated — and costly — to fix. If you receive bad data from your customers, it can have significant consequences for both the employer and the employee. Here’s a sampling of what’s at stake:
Restitution and refunds
You may need to compensate your customers for lost earnings or benefits on behalf of their employees due to delayed or incorrect payroll deductions or contributions — for example, if a 401(k) recordkeeper were to miscalculate a participant’s deduction amount and under-invest on their behalf.
Even if the error was minor, you’ll incur costs when fixing payroll errors, such as recalculating contributions or deductions. You’ll need to work with your customers to update any benefits or records impacted by such corrections.
Similarly, if your product or service introduces new payroll errors — even if they’re based on bad data you received from the customer — you may need to refund transaction or service fees paid, in addition to correcting the error.
Required audits
Prolonged or systemic issues causing repeated payroll errors may trigger an audit of your services, which means increased operational costs and lost time spent preparing for and undergoing an audit.
Compliance risks
If incorrect payroll data leads to non-compliance with legal or regulatory compliance, employers face fines and penalties — which you may have to cover as the service provider in the event you don’t catch the mistake quickly enough.
Tax penalties and fines
Errors in payroll data can lead to inaccurate tax filings, which can come with hefty fines for the employer. If you are responsible for filing accuracy and miss a critical problem with the data, you could have to foot the bill for any financial penalties levied against your customer.
Poor employer experience
Failing to catch a payroll error leads to downstream mistakes in your own product or service — which in turn creates a bad user experience for your customer. Rebuilding that trust takes a long time — and depending on the severity of the mistake, you could risk losing them as a customer altogether.
Increased workload
Payroll errors require resources to fix, whether it’s manual corrections, reconciliations, or updating internal records. If someone on your team has to spend time correcting payroll errors, that’s time taken away from other tasks.
You’ll also need to spend time supporting your customers as they correct the payroll errors, re-verifying new files or updated data, to ensure that any issues have been corrected.
How to avoid payroll mistakes using payroll APIs
The downstream impacts of using bad payroll data are significant, so catching these mistakes quickly — before they impact your operations — is critical. As a product or service provider, you can’t prevent some payroll errors if they originate on the employer’s side — you can only work with the data you’re sent. The good news is you can mitigate errors caused by manual processes and handoffs.
This is where payroll APIs can help — both by reducing the number of errors that occur by pulling data directly from the payroll system, and by syncing data between the payroll system and your application automatically on a recurring basis. Below are a few examples of how payroll API integrations can help you avoid payroll mistakes.
Automatic data sync
Payroll integrations can avoid some errors altogether just by automatically syncing data between your customer’s payroll system and your application. Many errors occur during manual transfers — when the customer or their payroll provider is exporting files, transforming data, and sharing those files with your application — simply because of human error. Manual data transfer is also always at least slightly out of date, because it only reflects a snapshot of the payroll system at the time the export was performed.
With payroll integrations, your product and your customers’ payroll system are kept in sync. You don’t have to worry that the data transfer causes a payroll error since your product has direct access to the payroll system.
Real-time data validation
Automatic data syncing can validate the data sent between the payroll system and your application, ensuring it all follows the same format and identifying blank or missing data fields. For example: if your customers’ payroll system is missing required data (like the employee ID or tax information), a payroll integration can flag these issues for correction.
Automatic error alerts
Payroll APIs automatically sync data between your application and the employer's payroll system, meaning you have a consistent flow of updated data from the employer. With this in place, you can build automatic error alerts into your product that automatically detect data anomalies as they’re sent from the payroll system.
For example: An application might implement a rule that would notify its user if a salaried employee’s gross pay suddenly changed, or if an employee’s birth date is in the future. Both rules could help the application to catch mistakes, and because the data is routinely syncing with the payroll system, these errors can be flagged as they appear in your application.
Scalability and updates
Payroll APIs can be adapted to keep up with ever-changing regulations and system processes, making them a much more scalable way to grow your business. This adaptability can help both you and your customers maintain compliance and reduce the chance of errors due to outdated processes or manual data handling. For example, you could flag 401(k) contributions that exceed the federal limit, and update the contribution limit each year.
Streamline accurate payroll data collection with Finch’s payroll API
Payroll APIs are powerful tools for collecting accurate payroll data from your customers; but building and maintaining integrations with all of the payroll systems your customers use is a drain on internal resources. With Finch’s unified payroll API, you can unlock access to 80% of US employers’ payroll systems with a single integration.
Thatch, an ICHRA provider, leveraged Finch to get to market 10 months faster, saving $800,000 in the process. Thanks to Finch, Thatch was able to save $800,000 in payroll costs and capture 10X more revenue. “Payroll integration shouldn’t be your core competency,” says Chris Ellis, co-founder and CEO. “It would take you longer and cost you more to reinvent the wheel.”
To explore how Finch can help your application avoid payroll errors, contact sales today.
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97% of HR professionals say it’s important for your app to integrate with their employment systems
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