8 Common Payroll Mistakes You and Your Clients Must Avoid

Everybody makes mistakes. After all, it’s part of being human. Accountants and clients alike are susceptible to making mistakes when it comes to certain tasks, like managing and running payroll. And with so much to keep up with, it can be easy to let payroll mistakes go unnoticed. To help keep your clients’ payroll in shipshape, learn the common payroll mistakes to steer clear of making (and how to avoid them in the first place).

1. Misclassifying workers

As employers, your clients are responsible for classifying a worker as either an employee or independent contractor. And as their advisor and accountant, it’s your job to make sure your clients classify their workers correctly. 

Worker misclassification can cause a boatload of issues for you and your client. When a client misclassifies a worker as an independent contractor, they don’t withhold taxes from the “contractor’s” wages. And, the misclassified contractor is not subject to overtime or minimum wage laws. Not to mention, contractors can’t receive employee benefits, like health insurance.

If your client misclassifies an employee as an independent contractor, they may wind up owing back taxes and paying penalties and interest.

How to avoid this mistake:

• Discuss the differences between employees vs. independent contractors with your client
• Keep clients informed on changes to the DOL worker classifications rulings
• Have your client fill out Form SS-8 to help determine a worker’s status

2. Classifying nonexempt workers as exempt

As you know, there’s another type of classification your clients need to worry about: exempt vs. nonexempt employees.

Nonexempt employees are protected by the Fair Labor Standards Act (FLSA), are eligible for overtime pay for hours worked over 40 during the week, and must earn at least the minimum wage. On the other hand, exempt employees are not protected under the FLSA. Therefore, your clients don’t have to pay exempt workers for overtime.

Some factors that can impact an employee’s classification include if they receive hourly wages or a salary, how much the employee earns annually, and the worker’s type of job duties (e.g., administrative).

If a client classifies an employee as exempt when they are supposed to be nonexempt, that worker could miss out on compensation (e.g., overtime), and the client may owe the worker back pay.

How to avoid this mistake:

• Discuss the difference between exempt vs. nonexempt employees with your client
• Review FLSA guidelines with your client
• Have your client complete the FLSA duties test

3. Missing tax deadlines

With so many taxes, it can be difficult to keep up with all of the deadlines. However, it’s a must if you want to help your clients avoid penalties and other problems down the road.

Deadlines for paying and filing can vary depending on the type of tax. Some payroll-related taxes may be due more frequently (e.g., quarterly), while others may only be due once a year.

Your clients trust you to know all of the deadlines and inform them of upcoming tax due dates.

How to avoid this mistake:

• Keep track of due dates on your calendar
• Provide a list of deadlines to your clients
• Set reminders for tax-related deadlines
• Verify any deposit frequency or filing changes with the state or IRS

4. Not planning for bank holidays

There are a number of federal bank holidays throughout the year that you (and your clients) need to be aware of. Bank holidays may seem innocent, but they can impact your client’s payroll.

Bank holidays are considered business days for payroll processing. So, if you or your client are not ahead of the game, your client may miss out on running payroll on time. Not to mention, your client could wind up with a bunch of disgruntled employees looking for their paychecks—and no one wants that.

How to avoid this mistake:

• Keep a list of bank holidays and mark them on your calendar
• Set reminders for yourself
• Inform clients of federal bank holidays
• Know what to do if a payday falls on a bank holiday (e.g., run payroll a day in advance)

In general, forgetting to run payroll on time is another blunder you and your clients surely want to steer clear of. Take advantage of some of the above tips, like setting reminders and tracking pay dates on the calendar, to ensure your clients pay their employees on time.

5. Miscalculating overtime pay

Calculating overtime pay is all part of the payroll job. But if there are miscalculations, your client could wind up owing employees money and paying penalties and interest.

Ensure you have a solid method (e.g., payroll software) to help calculate overtime pay for your clients’ employees. And, keep in mind that overtime for tipped employees is calculated differently than regular overtime.

Your clients should also know how to calculate overtime pay so they can pinpoint if something looks inaccurate on their payroll and answer employee questions.

How to avoid this mistake:

• Have a reliable way to calculate and double-check overtime pay
• Inform clients on how to calculate overtime pay
• Talk with your clients about overtime laws

6. Paying incorrect tax rates

As you know, tax rates are ever-changing. Some rates stay the same from year to year, while others are subject to change.

Using incorrect tax rates while running payroll for your clients is a big blunder you want to avoid at all costs. And if your clients use the wrong rates, they (you guessed it) have to pay back the taxes they owe, plus penalties and interest. Which in turn, can cause you and your firm money.

How to avoid this mistake:

• Regularly check your clients’ tax rates (e.g., once per year)
• Let your clients know to inform you if any rates change or if they receive a rate change notice
• Keep up with tax news to learn about tax rate changes
• Use payroll software that automatically updates certain tax rates for you

7. Making data entry errors

When you or your client runs payroll, it can be easy to make a mistake while entering information. From inverting numbers while entering an employee’s SSN to entering the wrong amount of time for a worker, mistakes can cost you and your clients a heck of a lot of time.

Regardless of if you’re using payroll software to run payroll or doing it manually, it is possible to make data entry errors. And said errors can wreak havoc on your client’s payroll.

How to avoid this mistake:

• Always double-check when entering any payroll-related information
• Use payroll software to prevent calculation errors and to help catch mistakes

8. Filing incorrect forms

With so many payroll forms to keep on your and your clients’ radars, it can be hard to keep up. The last thing you want to do (or want your client to do) is file an incorrect form.

Your clients should be in the know about all of the payroll-related forms their business needs to file. This can include forms like W-2, W-3, 941, 940, 944, etc. And again, your clients look to you for guidance on filing their forms correctly and on time.

How to avoid this mistake:

• Let clients know which forms their business needs to file (e.g., Form 941) and when they’re due (even if you’re the one filing the forms for them)
• Keep track of which forms each of your clients need to file in your records

If you or your client find a mistake, it’s best to handle the correction ASAP. That way, you can nip the issue in the bud before it snowballs into something bigger (e.g., accounting and tax problems).