Payroll Errors Payroll errors are common among small businesses, especially where dedicated accountancy software such as Xero or MYOB hasn't been deployed. It's frighteningly easy to overlook how much money is being lost every month through failing to keep track of employee hours or accurately calculating holiday pay and entitlements. Let's take a look at the top 10 most common Payroll mistakes made by small businesses. The 10 Most Common Payroll Mistakes (and how to avoid Payroll drama) Payroll mistakes are costly. They cost employers money, and they can lead to fines and penalties. And while some errors are unavoidable, there are ways you can avoid making mistakes that could end up costing your organisation big time. Here's 10 common Payroll errors and how to prevent them: #1. Misclassifying employees in Payroll system How each worker is setup in your Payroll system determines what tax rates they pay. If you classify someone incorrectly, you could end up deducting incorrect sums. For example, if you erroneously classify a worker as exempt from overtime pay, you can end up owing them wages that they are rightfully entitled to. It's important to ensure that any worker who is setup in your Payroll system has the correct parameters applied to their record to avoid overpayments, underpayments or other inaccuracies. Ensure you comply with the terms set out in each specific employment contract and any government legislation surrounding niche industries. On a related note, contractors are subject to different taxation rules and laws than salaried employees and typically do not receive the same range of benefits such as paid sick days and holiday entitlements, making it crucial to categorise workers correctly in the system. #2. Using Incorrect Tax Rates The most common reason for Payroll errors is the application of an incorrect tax code/rate. This is often unavoidable from an organisational perspective as the employee or contractor will typically indicate their tax code, but beware making assumptions Ensuring that your business processes include a step whereby your employee nominates their tax code can help avoid unnecessary errors. #3. Missing Payroll Deadlines Payroll is one of those things that seems like it shouldn’t take long, but once you start adding up hours worked, holiday and sick days taken, overtime, etc, it can quickly become cumbersome. Rushing can lead to mistakes, while paying employees late can lead to unwanted drama. Payroll processing needn't be a nightmare but if you don't make sure that Payroll gets done properly, you could lose control over your cash flow. Try to remain efficient and prepared by ensuring you have all necessary employee information entered correctly and ahead of time into your Payroll software prior to Payroll processing, including name, address, IRD number, salary, tax code and nominated bank account details. It's also crucial to ensure there is a sensible process in place to track and capture hours worked for each employee. Automatic payments can help ensure you never miss processing Payroll, and issuance of payslips can also be automated via modern Payroll software. #4. Miscalculating or failing to pay overtime Whilst there is no government legislation on overtime rates in New Zealand, it's not uncommon for employers to agree to an agreed overtime rate over a certain threshold. This can be formally via employee contracts or informally. If your organisation pays overtime to employees, it's actually fairly simple to build this into Payroll software so that the hourly rate for an employee's weekly or monthly hours over a certain number is automatically calculated and paid based on a percentage based overtime rate. #5. Keeping Payroll records for at least 6 years Payroll records need to be retained for a period of 6 years. This applies even for sole trader businesses as they show how much you make per hour or per week, the deductions you take out, and whether or not you pay yourself. If you are audited, it’s important to know what happened during those 6 years. For example, did you make errors in calculating wages? Did you fail to withhold taxes? Were there deductions that weren’t authorised? The IRD will expect these questions to be answered accurately and promptly. If you don’t maintain complete Payroll records, you could face hefty fines up to a cap of $20,000 in a 3 month period for multiple breaches. #6. Failing to accurately capture hours worked Before you process Payroll, it’s imperative that you check each employee’s pay period to ensure that all hours worked during the previous month are accounted for. For example, if an employee works 40 hours per week, he or she should receive four weeks pay. Many Payroll software providers include some functionality for capturing and authorising working hours. #7 Maintain confidentiality Payroll information should be kept confidential. This includes employee names, IRD numbers, addresses, phone numbers, bank account numbers, etc. These are considered personal information and must be protected. If you do not maintain confidentiality, you could face fines and penalties. Payroll information should always be stored securely. You should use encryption software to protect it. Encryption software scrambles the information so no one else can read it unless they have the correct key. Employees need to be trained to handle Payroll information correctly, and should know what types of records are required and how to keep those records secure. When subscribed to a package through one of the major accountancy software providers such as MYOB or Xero, you can be confident that Payroll information is kept securely in the cloud. #8 Keep up to date with Payroll tax changes The IRD are constantly amending rules and laws around tax, especially since the onset of the global pandemic. You must keep up to date with these changes to avoid landing your business in hot water. Be mindful of due dates and deadlines, as late processing can incur fines and/or interest charges. As of the time of writing, small businesses must file a Pay-As-You-Go return each tax year when paying employees more than the threshold amount of $50,001. An annual company PAYG return consists of: • An Employer Superannuation Contributions Return • An Employee Superannuation Contribution Returns • A Tax File Number (TFN) Update Form • An Income Tax Assessment Statement (ITAS) Ideally, work with a respected chartered accountant to ensure you meet your Payroll responsibilities on time, every time. #9. Failing to have a functional Payroll process This is the biggest source of pain when it comes to Payroll. While processes vary widely across companies, it is still the case that many businesses manage their Payroll manually. This can lead to errors and mistakes that cost employers money. There are many ways in which a poor Payroll system can cost your business. It can take far too long to complete Payroll when everything is handled manually, leading to an increase in human-error. If there is no way to track employee activity it can often lead to lost productivity and workers being paid incorrectly based on hours actually worked. And of course, where employees don't receive wages on time, morale and productivity can and usually will drop further. Outsourcing Payroll allows companies to focus on what matters most – running their business. An outsourced Payroll provider will take care of everything related to Payroll, including calculating wages, processing payments, handling taxes, and managing benefits. Best of all: they'll do all of this without requiring additional resources. #10 Choosing the wrong Payroll software Payroll software is great: we're a huge advocate of it! But not all Payroll software is created equally. Rushing into an uninformed decision and committing time and money into using a sub-par product for your specific needs will only cause headache and hair-loss in the long term. There are a number of excellent products to choose from, but it's important to do your research and not rush into a rash decision. Ideally, enlist the help of established, reliable chartered accountants such as Fenwick CA to help you make an informed decision. Talk to us There's lots that can go wrong with manual Payroll processing, but the good news is that we’re here to help. If you need help with your Payroll system — whether it's a managed Payroll service; help choosing and establishing a Payroll software provider; or up-skilling your staff to use your new service — talk to your Client Manager today. If you are not a current Fenwick CA client you can contact us and we’ll be happy to talk through your options. ------ Disclaimer: This article is a general advisory only. Before making any major decisions based on the information provided, please seek advice from your dedicated Fenwick CA Client Manager, or similarly qualified financial adviser.