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Dec 19, 2022 Matt Venuto

4 Most Expensive Consequences of Payroll Errors (And How To Avoid)

4 Most Expensive Consequences of Payroll Errors (And How To Avoid)

You’ll probably never make a mistake or payroll error, right?

It’s more common than you think. A quarter of all workers have suffered the consequences of payroll errors, and considering 49 percent of workers look for a new job after two paycheck errors, it’s best practice to ensure you avoid payroll errors at all costs.

Unfortunately, many payroll errors are human errors, meaning it’s difficult to control. If your business isn’t equipped to handle all of the admin that comes with payroll tax compliance, overtime, and record-keeping, at best, you might find yourself in a tight spot.

At worst, you might incur massive penalties that could cripple your business.

This article will highlight the four most expensive consequences of payroll errors and the steps you can take to avoid them.


How to Avoid the 4 Most Expensive Consequences of Payroll Errors

Many payroll errors come from a lack of understanding of the many rules and regulations surrounding payroll, taxes, and compliance.

It’s a minefield. 

How can you be sure you classify employees correctly? How easy is it to miss a deadline? You might also overpay or underpay employees, incorrectly track hours and overtime, and rely too heavily on paper processes.

You might feel overwhelmed and stressed when you’re handling all of the above in-house. You want to do your best for your employees and ensure you’re compliant. You’d be better off outsourcing payroll. The best payroll providers prevent the payroll errors we’ll talk about in this post.

With automated payroll and local experts on hand to answer your questions about payroll, taxes, and the best way to manage complicated payroll processes, ConnectPay helps small businesses overcome roadblocks and challenges and gain peace of mind.

Schedule a call with one of our small business payroll specialists to get started.

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Consequence #1. Labor Hours Wasted Correcting Errors

Managing payroll yourself already takes up a lot of time. It’s a high-priority task and is often complicated. Add errors to the list, and your HR department won’t be doing anything except chasing and correcting payroll errors.

It’s not only time that you lose. If you continue to make errors, you’ll have the IRS breathing down your neck. It’s their job to know exactly where money is going. They’ll wonder if you’re making mistakes or trying to rig the system.

To avoid wasted labor hours and IRS audits, consider a payroll provider. Payroll management software with robust features such as automated pay and compliance updates, intuitive time and attendance software, and simplified reporting, can help eliminate payroll mistakes and guide you to a successful payroll operation.


Consequence #2. Retroactive Tax Payments

It’s hard enough keeping up with all things tax compliance. For example, here’s a list of tax rates and other regulations you need to check in case they’re updated:

  • Federal, State, and Local tax rates
  • FICA taxes (Social Security and Medicare)
  • FUTA taxes (Federal Unemployment Tax)
  • The Fair Labor Standards Act
  • The Equal Pay Act

Further, you’ll need to manage tax forms and filing. It’s a lot to think about!

You’ll also need to ensure your company and employee information is up to date and tax numbers match payroll records. When you classify employees as independent contractors, but they should be classified as employees, you incur penalties.

And if you get any of it wrong, you’ll need to report it to state and federal entities as soon as possible. You might face fines and penalties as a result of an error. The IRS might force you to come up with overtime pay if you miscalculate an employee’s pay, and you’ll likely need to pay back taxes.

The best way to avoid payroll and tax errors is to work with a payroll provider that assumes responsibility for any tax errors. Some providers give a ‘no tax penalty or fee guarantee’ so you can have peace of mind.


Consequence #3. Compliance Error Penalties

You face penalties if you fail to comply with payroll and employment laws. Penalties are usually monetary but could include interest on back taxes, civil and criminal sanctions, and jail sentences. Don’t forget the loss of reputation, too.

Let’s look specifically at payroll taxes:


# of Days Late


1 to 5 days


6 to 15 days


16+ days


10+ days after the first notice from the IRS



Let’s say your company has fifty employees, and you owe the IRS $19,500 in monthly payroll taxes. If you’re late and don’t pay the total amount until seven days after the due date, you’ll receive a 5 percent penalty on the $19,500. You’ll owe the IRS an additional $975.

The IRS will also fine you for willful failure to withhold employee pay and payroll taxes from federal and state agencies. You can expect to pay back FICA taxes and income tax withholdings for misclassification errors.

Related Read: Do I Need a Payroll Service? 6 Reasons You Need Professional Payroll Help

Compliance errors are expensive and potentially devastating. To avoid compliance errors, ensure your budget accounts for tax payments, stay up to date with IRS announcements, and finally, outsource payroll to a provider, freeing up your time to work on moving your business forward instead of worrying about payroll compliance.


Consequence #4. You’ll Lose Employee Trust

In the United States, 65% of workers live paycheck to paycheck. If you miscalculate their compensation, you risk employees feeling cheated and unable to pay their bills on time. Late paychecks add stress to their lives.

Errors have far-reaching effects. Employees will feel less likely to do a great job, productivity will take a hit, and some will look for work elsewhere. You’ll then incur further costs to replace lost employees, and who’s to say you won’t make the same mistakes twice?

Think of your reputation, too. If former employees display their annoyance on social media platforms, job boards, and other channels, you might receive backlash, and potential employees could be put off when researching your company.

To avoid violating and losing employee trust, eliminate mistakes. Payroll errors are human errors. With automated payroll and data input validated by you and your employee, there won’t be any mistakes. Encourage employees to keep you updated about significant life events, and use a payroll system that identifies and prevents errors.


Payroll Processing: The Easiest Way to Avoid the Consequences of Payroll Errors

Which processes can you automate? What can you outsource? As a business owner, you might not have the time to stay on top of paperwork, changing regulations, and human error.

Make your life easier and partner with a payroll provider. You’ll have industry experts who can easily manage your payroll, eliminating expensive errors. With robust reporting and bulk processing, you can check and recheck your payroll before making payments.

ConnectPay takes the hassle out of payroll and connects you with reps who can answer the most difficult questions, are experts in 401ks, Workers Comp, and more, and can help streamline your payroll.

For more information and guidance, check out our free resource, the Connected Guide to Small Business Payroll!

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Published by Matt Venuto December 19, 2022