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A distributed workforce composed of remote employees or independent contractors in various U.S. states is just one complex example of the many work models businesses face today. The range of work models that affect how, when, and where labor is performed means it’s easy for businesses in the U.S. to make costly payroll errors.
Luckily, many software solutions can assist with administering error-free payroll.
In this article...
The Most Common Payroll Mistakes and How to Avoid Them
With the growing number of payroll-related litigations, it’s crucial that businesses perform their due diligence to avoid three of the most common payroll mistakes. Otherwise, they may face significant legal and financial repercussions.
1. Not paying overtime appropriately
At the end of 2022, the outcome of a class-action lawsuit against Aurora Health Care ruled that the employer owed employees $8.75 million in back pay for unpaid overtime wages. Litigation regarding overtime is typically a class-action lawsuit in the U.S., affecting roughly 20 people or more.
A simple payroll miscalculation or oversight can end up costing an employer millions of dollars in legal fees. It can also generate negative press for a brand.
How to calculate overtime pay
According to the United States Department of Labor, if an employee has worked more than 40 hours in a workweek, earns less than $35,568 annually, and performs manual, non-office work, the employer is legally obligated to pay them at a rate of 1.5 times their normal wages for extra hours over that 40-hour threshold.
Employers also need to pay attention to certain state laws that stipulate additional rules for paying overtime. To simplify things, the non-profit organization Workplace Fairness has a detailed online resource that helps businesses determine when employees are exempt from overtime wages.
Tracking overtime for salaried employees is trickier to navigate. Depending on an employee’s salary and the duties they perform, they may be exempt from earning overtime pay. For instance, employees earning an annual salary of more than $35,568 and who perform non-manual office work are ineligible to receive overtime compensation.
If an employee who is ineligible for overtime pay routinely works more than 40 hours per week, the employer may want to:
- Adjust the employee’s salary to reflect the amount of work they perform
- Distribute workloads more evenly to prevent burnout
- Reevaluate workloads to ensure an employee is held responsible only for what their role entails
How time tracking software can help
Time tracking software logs employee clock-in and clock-out times to create a record of the time they worked each week. Rather than payroll employees spending hours collecting and organizing timesheets, the software automatically adds all the time together to ensure accurate pay stubs.
This way, it’s easier to discern which employees worked more than 40 hours in their workweek and pay them accordingly. Time tracking software works through geofencing, computer or mobile device logging, GPS tracking, or an on-premises time clock.
Top time tracking software solutions include:
2. Not paying the correct minimum wage
Unless they’re salaried, employees in the U.S. are paid at least the current federal minimum wage of $7.25 per hour, but this can vary by state, county, and even city.
For example, in Washington State, the state minimum wage is $14.49 per hour, taking precedence over the U.S. federal minimum wage of $7.25 per hour. Furthermore, Seattle’s Office of Labor Standards’ Minimum Wage Ordinance requires businesses to pay employees who don’t receive tips or medical benefits $17.27 per hour.
This example of Seattle alone underscores the complexity that payroll administrators face and doesn’t even account for today’s distributed workforces. Given the challenges, it’s no surprise that the window for human error is quite large — not to mention costly.
How payroll software can help
Payroll software greatly reduces the chances of human error and ensures employees are paid promptly and correctly according to city, county, and state rules. ADP, for example, keeps payroll administration compliant by automatically determining wage requirements and storing payroll records in one place in case of an audit.
Top payroll software solutions include:
Also read: 8 Reasons Accounting Software Isn’t Just for Big Business
3. Misclassifying employees as independent contractors
The rise of the gig economy in the U.S. labor market has brought an interesting debate over who is and isn’t considered an independent contractor.
Uber recently had to pay the state of New Jersey $100 million in back taxes after the company misclassified New Jersey drivers as independent contractors. Classification challenges have come from other states as well, such as California, Massachusetts, and New York. The Uber example illustrates that companies that rely on so-called gig workers need to be careful about how they’re classifying that labor.
However, U.S. companies operating in a more traditional industry will likely find it easier to distinguish between an employee and a contractor.
The IRS outlines three different categories for helping employers classify workers as employees or independent contractors: behavioral, financial, and type of relationship.
- Behavior category: This addresses the degree to which the employer has control over the scope and methods of the service provider’s behavior. Employers have much more say over the behavior of employees than they do with independent contractors.
- Financial category: This has to do with who sets the pay rate for the service provider. An employee usually accepts a set wage from an employer, whereas an independent contractor typically sets a price for their services.
- Relationship type category: The relationship factor is about whether the employer contributes toward the service provider’s health benefits and offers them paid time off. It also relates to the duration of services, whether a set duration or indefinitely. Employees receive health benefits, paid time off, and usually fulfill an ongoing business need. Independent contractors, on the other hand, are on their own for benefits, don’t get paid time off, and typically work for a finite period of time.
The IRS is quick to note that there’s no hard and fast rule that determines what constitutes categorizing someone as an employee or an independent contractor. It’s at the company’s discretion to weigh the above factors.
When an employer is still unsure how to classify a service provider, companies must file an SS-8 form with the IRS. This form turns over the decision to the IRS to determine the service provider’s status.
Either way, this is one area to pay special attention to in order to avoid the consequences of misclassification that Uber recently faced. The line between employee and independent contractor can be a bit of a razor’s edge that, when ridden too closely, can result in a costly and time-consuming legal battle.
How payroll software can help
Many payroll software solutions such as Justworks, Quickbooks, and Paylocity keep track of U.S. government regulations that stipulate how employees are to be classified and paid accordingly.
For example, Justworks automatically updates the tax filing process according to how an employee is classified — whether as an employee or an independent contractor — so payroll and HR staff don’t have to. For instance, payroll for an independent contractor will not have taxes deducted, while an employee’s paychecks will.
Utilize Software to Protect Your Business From Costly Payroll Errors
Payroll can be complex, and it’s easy to make mistakes. Getting it wrong can lead to costly lawsuits. However, payroll and time tracking software can help U.S. businesses avoid these costly and easy-to-miss mistakes.
If none of the vendors mentioned here seem right for your business, try our Payroll Product Selection Tool to get an unbiased list of payroll software vendors customized to your needs.
Top Payroll Software Recommendations
Timely, accurate payroll – in house! Workzoom is the all-in-one people management software that will help you confidently handle complexities with a simple pay process so you can spend less time journalizing pays and updating your G/Ls while remaining totally compliant.
Paychex is a cloud-based payroll management system offering payroll, HR, and benefits management systems for small to large businesses. Paychex covers payroll and taxes, employee 401(k) retirement services, benefits, insurance, HR, accounting, finance and Professional Employer Organization (PEO).