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9 Types of Payroll Mistakes That Could Crush Your Business

9 Types of Payroll Mistakes That Could Crush Your Business

If you are a business owner, you know the trials and tribulations that come with payroll. From changing state laws to changing payroll applications, there are many opportunities for mistakes to be made. Over time, the problems can enlarge in scope, especially if they are not caught in time. Knowing the common problems of payroll can help you avoid headaches as you grow your business. Here are the 9 types of payroll mistakes that could damage your business if left unchecked.

Editor’s Note: This content is for educational purposes only. Please consult with a lawyer or CPA if you find yourself making one of these mistakes.

downsides to payroll errors

Additional Reading: 3 Key Differences Between Semi-Monthly vs Bi-Weekly Payroll

1. Misclassifying Employees

One of the most common types of payroll mistakes is misclassifying employees. A common example would be misclassifying a W-2 employee as a 1099 independent contractor. Doing so would mean that a business doesn’t have to cover items such as insurance, sick time, unemployment insurance, and other vital rights to workers.

This creates multiple problems. Firstly, workers don’t receive the same rights as regular employees but still have to deal with all the downsides of being an employee. Downsides could include not being able to set their own schedule, not being their own boss, and having to manage their taxes. Second, states and federal agencies also suffer from lost funds to companies not paying taxes.


According to the IRS, businesses should keep three main questions in mind when classifying employees:

1. Behavioral Control
        • Does the company control or have the right to control what the worker does and how they do it
2. Financial Control
        • How much control does the business have over the financial and business aspects of the worker’s job?
3. Relationship of the Parties
        • Are there any written contracts or employee-like benefits? How long will the relationship continue and is it an integral part of the business?

Workers can also file form SS-8 which will have the IRS get involved in deciding if you are an employee and deserve the rights of an employee. You can find out more about independent contractors, employees, and Form SS-8 on the IRS webpage titled: Independent Contractor (Self-Employed) or Employee?

2. Miscalculating Pay

Another common type of payroll mistake is miscalculating employee pay, whether that be underpaying them or overpaying them. Underpayment can result in an employee being disgruntled and filing a claim with the Department of Labor. Overpaying can result in lost revenue and a disgruntled employee as well if you have to reduce pay at a later date.


You’ll want to introduce multiple ways to check for hours worked. You can do that through the usage of a time and attendance system as well as an automated payroll system, which will make it easy to review employee paychecks.

3. Incorrectly Tracking Employee Hours

Much like miscalculating pay, incorrectly tracking hours can lead to a loss in revenue or incorrect pay for employees. This is most common in businesses that do not have a robust time tracking system. Incorrectly tracking employee hours can also affect things like overtime pay.


Review your state’s laws surrounding worker pay and overtime pay standards. Furthermore, keep detailed and organized records of employee work hours. You can do this easily with payroll and time attendance software integrations.

4. Underreporting All Forms of Taxable Employee Compensation

You just need to report an employee’s salary to authorities, right? Wrong! Companies often forget to report other forms of income such as overtime, commissions, stock options, prizes, and other forms of compensation. All this information must be reported to the IRS.


Keep a detailed record of all employee compensation or purchases for employees. Whether that be a gift card or the end of the monthly bonus. The IRS will view that as employee compensation.

5. Incomplete Record Keeping

Record keeping is extremely important should the IRS ever audit your business. Without records to back up what you filed on your taxes, you may be hit with fines or penalties for unpaid taxes.

Not to mention, tracking and finding mistakes in your payroll process may be near impossible without a detailed record.


Use a payroll system that makes it easy to track and file records. You can also outsource your payroll and have them track your record for you. Some outsourcing firms will even represent you to the IRS should you ever be audited.

How do payroll mistakes affect workers?

6. Missing Any Deadlines

Missing deadlines for payroll for any reason can result in negative consequences. If you miss a payroll deadline, your workers are going to become aggravated and be more likely to leave your business. Furthermore, they may file claims against you with the Department of Labor. If you miss any deadlines when it comes to payroll taxes, this can result in fines and unwanted headaches. This type of payroll mistake can be easily remedied with better procedures and software.


Develop a robust payroll system and complete payroll days before the due date. This way, you have time to catch mistakes in your payroll system. Using payroll software can help you speed up the process as well. Set reminders and block out time amongst HR duties specifically for payroll.

7. Issuing an Incorrect W2

While W2s mainly deal with tax season, it can reveal a much larger problem with your payroll or be a minor mistake. The worst part? It creates multiple points of frustration for your employees. They may have to contact you for a new form, or if there is a much bigger problem, you may end up owing your employee money! Not only do incorrect W2s cause problems for your employees, but you can face penalties and other repercussions for issuing incorrect information.


Conduct multiple checks before issuing W2s and keep a detailed record of payroll. Again, you can use an outside CPA firm to help with this.

8. Mistaking Gross vs. Net Payroll

Net or gross payroll, do you really need to measure both? Absolutely, but most small businesses don’t or mistake gross and net payroll.

Gross Payroll: All wages earned by employees before taxes and deductions.

Net Payroll: Wages earned after taxes and deductions.

Not having this information means that you cannot determine your actual payroll costs.


Have your HR staff calculate this for you. This can also be achieved with payroll software.

9. Not Staying Up to Date with Current Laws

While it may seem self-explanatory, regulatory laws can’t change locally, at the state level, and even federally. Not keeping up with these latest changes can result in fines or penalties for your business. This is one of the types of payroll mistakes that are easily avoidable if you have systems in place to catch mistakes.


You do not need to hire a special team to stay up to date. You can use payroll software that will automatically update and check your payroll for compliance and mistakes.

How to Improve Your Payroll

If you are tired of making these payroll mistakes and paying for costly mistakes, it is time to up your game! There are two main options that can help you.

  1. Payroll software that can track and organize all your payroll needs.
  2. Outsourcing your payroll to companies that specialize in your payroll needs.

360Connect can help you with both options! Just fill out our 1–2-minute form and we can help you find a payroll system that works for what you need. It is super simple, and you’ll receive 100% free quotes!

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