Preventing Payroll Errors: Five Tips Every Employer Should Know

Payroll mistakes can be expensive. They not only cost your business money, but can also lead to fines or penalties. While some errors are unavoidable, many can be easily prevented with a little attention to detail. Here’s a look at 10 common payroll mistakes and how to avoid them:

1. Misclassifying employees in the payroll system

How you classify your employees in your payroll system directly impacts their tax rates and entitlements. If you get it wrong, you could end up deducting the wrong amounts or even owe  your employees wages they should have been paid. For example, misclassifying an employee as exempt from overtime could mean paying them back pay for overtime they were entitled to.

To avoid this, make sure each employee’s details are set up correctly in your payroll system. Double-check that their classification matches their employment contract and that it complies with any specific rules in your industry. Also, remember that contractors have different tax rules to regular employees, so be sure they’re categorised correctly.

2. Using incorrect tax rates

One of the most common payroll errors is applying the wrong tax code or rate. Employees usually provide their tax details, but you should never just assume they’re correct. Mistakes can happen if tax codes aren’t updated, or if an employee forgets to notify you about a change.

To reduce the risk of errors, make it part of your process to confirm tax codes when employees first start and periodically check that the information is up to date.

3. Missing payroll deadlines

Payroll might seem like a simple task, but once you factor in hours worked, leave, overtime, and deductions, it can get complicated. Rushing to meet deadlines can lead to mistakes, and paying employees late can cause frustration and even legal issues.

To stay on top of it, ensure all your employee details (like name, address, tax code, bank info, etc.) are entered correctly and well in advance. Having a clear process to track hours worked and using payroll software that automates payment, and payslip generation, can also make life much easier.

4. Miscalculating or failing to pay overtime

Although there’s no official overtime legislation in New Zealand, many businesses agree to an overtime rate with their employees. If you’re paying overtime, it’s important to make sure your payroll system automatically calculates it based on the agreed rate.

For example, if an employee works over a certain number of hours in a week, the system should apply an overtime rate to those extra hours to ensure they’re paid correctly.

5. Failing to keep payroll records for 7 years

In New Zealand, businesses must keep payroll records for at least seven years. This includes details like how much you pay employees, the deductions you take out, and any contributions you make. Even if you’re a sole trader, keeping detailed records is a must. If the IRD audits your business, you’ll need to show exactly how much you’ve paid your employees, and how taxes were handled. If you don’t have complete records, you could face fines - up to $20,000 for multiple breaches over three months.

By staying on top of these common payroll mistakes, you’ll save your business time, money, and potential headaches. A little planning and organisation can go a long way in ensuring you stay compliant, and keep your employees happy.