Even careful employers make payroll errors from time to time. But building some operational redundancies into your payroll processes can help you catch mistakes early, avoid repeating them, and create a reliable system.
What you’ll learn
What you’ll learn
Key takeaways about payroll errors
- Payroll errors can hurt employee morale, create unnecessary business costs, and trigger compliance issues with tax authorities.
- Common payroll mistakes include missing deadlines, misclassifying employees, miscalculating pay or overtime, and failing to keep up with changing laws.
- Preventing inaccuracies involves developing clear policies, regularly auditing processes, automating systems, and staying informed about relevant state and federal regulations.
In this guide, we cover some of the most common payroll errors, how you can set up processes to avoid them, and what to do if one slips through anyway. If you’re curious what happens when these errors go unaddressed, check out our guide to the consequences of payroll errors. You may also find our video on common payroll mishaps helpful:
What do payroll errors cost a business?
The cost of payroll mistakes goes beyond a single paycheck.
May affect morale
Repeated errors can upset reliable employees and chip away at their confidence in your leadership. This lack of trust can lead them to consider other job opportunities. According to OnPay’s 2025 Small Business Outlook, recruiting talent keeps more than half of small business owners up at night, and around 50% are concerned about retaining the employees they already have.
Given how much time and effort it takes to find great people, losing them over an avoidable payroll error is especially frustrating.
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Out-of-pocket costs
Payroll errors can lead to spending money where you don’t need to. For example, you may experience something called payroll leakage.
Payroll leakage refers to money lost due to payroll inefficiencies, errors, or outdated processes. Over time, even small recurring mistakes can add up and drain resources you could otherwise use to fuel business growth. Duplicate payments, incorrect overtime calculations, and unclaimed tax credits are common culprits. According to KPMG, payroll leakage costs employers 2% to 5% of their total annual payroll.
Compliance considerations
Mishaps affect more than just a pay stub. Having employees also comes with specific tax obligations, such as paying FUTA taxes to help fund unemployment insurance (typically owed to the IRS on a quarterly basis), and making sure FICA taxes (which consists of both Social Security and Medicare taxes) are also taken care of.
— David Kindness, CPA
You want to ensure you set these deductions up properly from the outset so you pay these taxes correctly, on time, and to the right agencies. Doing so helps you avoid compliance-related issues with the IRS.
The table below sums up what happens when mishaps continue unchecked.
| What can happen | Why it matters |
| Mistakes can erode trust, affect morale, and cause top performers to leave after repeated errors. | Retention costs rise when experienced employees quit. |
| Outdated processes and manual work lead to “payroll leakage,” which costs businesses 2% to 5% of total payroll. | You have less money to reinvest in growth, benefits, or technology. |
| Errors in paying or reporting taxes (like FUTA or FICA) can trigger costly compliance penalties. | Even small mistakes increase the risk of IRS audits or fines. |
| Frequent or uncorrected errors affect employer reputation and employee confidence. | Becomes harder to attract and keep quality talent. |
With an idea of how payroll mistakes can affect an organization, let’s look at some of the most common slip-ups to watch for.
What are the most common payroll errors?
Every company is different, but some mistakes come up again and again when processing payroll. Here are 11 of the most common.
Missing deadlines
Businesses must manage payroll tax withholdings, filing payroll tax returns, and depositing taxes with federal and state agencies on specific dates throughout the year. Payroll errors complicate depositing withholdings and filing returns accurately and on time.
For example, if you withhold more than $1,000 in Social Security, Medicare, and federal income taxes from your employees’ wages, you need to fill out and submit Form 941, Employer’s Quarterly Federal Tax Return, by the last day of the month following the end of each quarter.
You can find more information on payroll tax deadlines in our payroll tax calendar.
Pro tip
“Never be tempted to ‘borrow’ from payroll tax deposits if cash flow gets tight. I get it, it’s tempting… but trust me, the IRS will come after that money relentlessly and can even hold you personally responsible.”
— Noel Lorenzana, CPA and OnPay subject matter expert
Missing deadlines, whether intentional or not, can lead to IRS penalties and interest. Mark important dates on a calendar and use a reliable system to manage payroll and payments. Most reliable payroll software does this automatically. It can even handle significant portions of the calculation and submission process for you. This is especially important if you’re learning how to do payroll yourself.
Late payments
Paying employees late undermines trust and can cause anxiety for those who rely on timely paychecks to manage their personal finances. Employee productivity can suffer when they’re stressed about personal finances, according to a report from the MIT Department of Economics. Late payments can also lead to fines. For example, Pennsylvania law states that employers that don’t pay employee wages within 30 days of a scheduled payday can face a fine of 25% of the total amount of wages due or $500, whichever is greater.
Miscalculating pay
Some payroll errors come down to simple math and setup mistakes. For example, someone might enter the wrong number of hours, miss an employee’s overtime rate, or divide an annual salary into the wrong number of pay periods. These errors are easy to make and miss without a system to catch them.
Overlooking overtime rules
Violating overtime rules is a common payroll error. Under the Fair Labor Standards Act (FLSA), non-exempt employees must receive overtime pay when they work more than 40 hours in a workweek. The overtime rate can’t be less than one-and-a-half times their regular rate of pay (commonly known as time-and-a-half).
Businesses sometimes misclassify employees as exempt or don’t have a system to track hours worked accurately. This makes it tough to know who should receive overtime pay when calculating wages. Using a time-tracking system synced to your pay runs can help. It’s also a good idea to clearly communicate overtime policies to employees, discuss any shift differentials you offer, and add a section to your company handbook.
Misclassifying employees
This happens when an employer lists an employee as an independent contractor or vice versa.
It can lead to trouble with the IRS and the Department of Labor (DOL) because taxes and employment laws differ by classification. Each classification should receive a different form by January 31 each year.
- Employees receive a Form W-2
- Freelancers and independent contractors receive a Form 1099-NEC
If January 31 falls on a weekend or federal holiday, the deadline moves to the next business day.
If you need to update an employee classification with the IRS, or you’re not sure how to classify a worker, you can complete and submit Form SS-8 to get guidance from the IRS.
Good to know
“The IRS and the Department of Labor take worker classification very seriously, and it’s not a choice you get to make. If someone works under your direction, uses your tools, follows your schedule, and relies on you for steady income, they’re probably an employee — not an independent contractor.”
— Noel Lorenzana, CPA
If a worker believes you classified them incorrectly, they can report this to the federal government. Misclassifying employees as independent contractors is a common error that can lead to significant legal and tax problems, including:
- Owing back pay, medical, retirement, paid leave, and any other regular employee benefits a misclassified worker didn’t receive while classified as a contractor.
- An employee misclassified as an independent contractor who gets hurt on the job won’t be covered by workers’ compensation insurance, so you could be liable for medical bills and lost wages.
- You don’t withhold unemployment insurance from payments to employees misclassified as independent contractors. If you lay them off, you could be legally responsible for making up these payments.
- Underpayment of payroll taxes, which can result in significant payroll tax penalties.
- Penalties and back taxes if an IRS or DOL auditor discovers the misclassification first.
- Legal issues with the Department of Labor (DOL).
Understanding the rules and staying aligned with your team can go a long way toward building trust and avoiding unwanted attention.
Not keeping up with changing laws
Minimum wage and employment tax laws can change over time, sometimes with little notice. For example, in late September 2023, California passed legislation increasing the minimum wage for fast food workers. The new minimum wage took effect April 1, 2024, giving employers just about six months to adapt.
Keeping up with legislation in the state and local jurisdictions where you do business and having the right tools and payroll expertise helps you stay ahead of these changes.
Tax issues related to employee classification
Misclassifying employees as independent contractors is a common error that can lead to significant legal and tax problems. This mistake can result in:
- Paying employees who were incorrectly classified as contractors back pay, medical, retirement, paid leave, and any other regular employee benefits that they did not receive while being classified as a contractor.
- Worker’s compensation: If an employee is misclassified as an independent contractor and they get hurt while on the job, they won’t be covered by insurance, and employers could be liable for their medical bills and lost wages.
- Unemployment insurance: Employees misclassified as independent contractors won’t have unemployment insurance withheld from their paycheck. If they get laid off, the employer could be legally responsible for making up these payments.
- Underpayment of payroll taxes, which can result in significant tax penalties
- Penalties and back taxes if this issue is discovered during an audit
- Legal issues with the Department of Labor (DOL)
Avoid mistakes
“OnPay is perfect for that small business owner who wants to avoid payroll mistakes, pay employees on time, and take care of quarterly reporting with ease. It’s been the best investment for my business!”
— Shelley Medeiros, Owner, Shelley Medeiros Agency
Failing to keep records
Federal agencies require businesses to keep payroll records for a certain period of time. The IRS says employers should keep employment tax records for at least four years. This is especially important if you ever face an IRS audit.
There are many ways to keep files safe, secure, and accessible, both digitally and physically. Some businesses use a cloud-based storage system to organize and retrieve documents. Others stick with analog solutions like a sturdy, lockable filing cabinet.
Check out our article on maintaining payroll records for guidance on the documents you need to keep track of, plus tips from payroll professionals.
Making retroactive payments incorrectly
You owe an employee retroactive payments, or “retro pay,” for wages due but not paid in a previous pay period. These payments are necessary sometimes, but errors in calculating or processing them create further complications. If you find an error, take care to avoid making another mistake while fixing the first one.
Common mishaps with retro pay include:
- Forgotten or delayed pay raises
- Miscalculated overtime
- Mistakes in calculating bonuses
- Overlooked shift differentials
- Errors in commission calculations
- Not updating for a state’s minimum wage increases
- Retroactive court-ordered payments due to employment law issues
It’s a good idea to read up on how retroactive pay law works to stay ahead of the game.
Not reporting garnishments
Other oversights include failing to report court-ordered wage garnishments, making manual errors when filing them, and missing deadlines. These mistakes can happen intentionally or unintentionally. Either way, they can lead to fines and legal action.
Garnishment orders specify the maximum percentage of an employee’s income you can withhold, so calculating them incorrectly can harm the employee and create legal and regulatory issues. Garnishment orders also typically specify a start and end date for withholding. You must follow this timeline as well as the withholding and reporting deadlines specified in the order.
Not reporting new hires
In almost every state plus the District of Columbia, you must report new hires to the state government where you do business. New hires need to complete a W-4 form so you can calculate the proper tax withholding each pay period. They also need to fill out an I-9 form.
Most states have a web-based “new hire reporting center” to help employers complete these tasks, like this one for Georgia and this one for Illinois.
Most payroll service providers handle this for business owners. For example, OnPay reports this information for clients each Friday. If you’re not already working with a payroll software provider, add this task to your to-do list each time a new worker joins your team.
Most payroll service providers will do this for business owners. For example, OnPay reports this information for clients each Friday. But if you are not already working with a payroll software provider, then this is a task you’ll need to add to your to-do list each time a new worker joins your team.
Failing to report all taxable forms of compensation
Almost all income is taxable unless specifically exempted by law. Compensation like fringe benefits or bonuses is usually taxable, and you must report it correctly. Often, employers don’t entirely understand what’s taxable compensation and what isn’t.
Overlooking this can affect year-end tax forms. For example, you have to add the value of taxable fringe benefits, like bonuses or an employer-provided vehicle, to gross income on an employee’s W-2 form. Knowing the difference between taxable and nontaxable income can prevent a flood of filing mistakes that would otherwise turn rewarding employees with perks into a headache.
Avoiding errors in payroll management
Most payroll errors are preventable with the right habits and systems in place. Here’s where to start.
Having a clear payroll policy can help prevent misunderstandings. A policy should spell out:
- The type of pay period you use (bi-monthly, bi-weekly, or semi-monthly)
- The types of pay you use (regular pay, overtime, fringe benefits, bonuses, commissions)
- Any required deductions (and why employees may see differences between gross and net pay)
- Who on your team handles taking care of errors that come up
Everyone involved in payroll processing should understand and follow these guidelines at all times.
Evaluate your current payroll provider and processes
Review your payroll provider and processes regularly to ensure they meet your business’s current needs. Sometimes, switching providers or updating processes can significantly reduce errors and time spent on managing and processing payroll.
Automate and integrate payroll processes
Automation minimizes human error and helps ensure timely calculations and payments. Integrating payroll processes with other business systems can streamline your operations and ensure consistency.
Develop a payroll calendar and checklist for weekly and monthly activities
A detailed payroll calendar and checklist can help you stay organized and ensure you don’t miss critical deadlines or payroll tasks. Regular monitoring and updates can prevent last-minute scrambles and mistakes.
Schedule regular payroll audits
Though you likely won’t need to add this to your calendar every week, it’s a good idea to schedule a payroll audit at least once or twice a year. This can help you spot operational gaps, see if you’re overbooking schedules, and keep your books in order.
How to fix payroll errors (If they happen)
The way you fix a payroll error depends on the type of mistake whether it’s an underpayment, overpayment, tax miscalculation, or duplicate payment. In most cases, you should correct errors as soon as you discover them, ideally before the next pay cycle closes.
- First, uncover any issues: Having a process in place to double-check for payroll errors, or to allow employees to notify you of issues, can help you address payroll mistakes quickly and efficiently. Letting employees take part in the process helps build trust and empowers them to speak for themselves.
- Next, address the issue immediately: Correcting errors promptly shows your commitment to accuracy and employee satisfaction.
- Then, communicate with affected employees: Transparency is key. Inform employees of the mistake and the steps you’re taking to resolve it. Let them know you have their best interest at heart and will work to avoid similar mistakes moving forward.
- Finally, adjust future payrolls: Correct any issues with your current payroll process. If the error you identified could happen again in subsequent payroll runs, update your process accordingly to ensure ongoing accuracy and educate everyone on your team who’s involved in the payroll process.
While you can correct many payroll errors in the next pay cycle, some mishaps require immediate action. These usually include duplicate payments, payments to terminated employees, or significant overpayments. In these cases, you may need to run a payroll reversal to undo the entire transaction and pull funds back from the employee’s account.
Payroll errors can be avoided with a dash of expertise
Avoiding payroll mistakes saves time and money, and keeps employee disputes to a minimum. Left unchecked, errors can put your company at risk, drag down employee productivity, and affect your bottom line. It’s not something you need to think about every day, but reviewing your payroll operations throughout the year is a smart way to protect your business and give your employees peace of mind.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.