An estimated 82 million U.S. employees are affected by payroll problems, with about a quarter of all workers dealing with paycheck errors. The IRS has estimated that around one-third of employers make a payroll mistake in any given year, collecting nearly $7 billion in penalties for 2021. The average cost of these mistakes to employers clocks in at nearly $850 per year.
Though it may seem like a straightforward process, payroll can actually be a complex and time-consuming process for employers. Mistakes and discrepancies can cost you by way of violations, penalties, and fines. As a global employer, you may be wondering exactly how much payroll errors are costing you.
The answer depends on the types of payroll mistakes you’re making.
This guide will go over some of the most common errors payroll administrators make. It will also examine just how much these errors could be costing you.
Most Common Payroll Mistake: “Failure to Pay” Payroll Taxes
The IRS hands out millions of payroll penalties in any given year. The bulk of those penalties are assessed as “failure to pay” with over $1 billion in fees.
Delinquency accounted for nearly a million penalties in 2021, but failure to pay means you didn’t pay all or part of the payroll taxes you owed as an employer. Perhaps you remitted your income tax withholdings, but you forgot to submit Social Security and Medicare taxes.
Payroll taxes are considered trust fund taxes. The IRS implemented the Trust Fund Recovery Penalty (TFRP) to encourage prompt payment of payroll taxes. It requires “willful” failure to take action, but even if you can prove the failure to pay was unintentional, you will likely still face fines. The IRS assesses penalties for unpaid payroll taxes depending on the type of tax, but typically it will be to the tune of 100 percent of the unpaid tax plus interest. The longer the money is unpaid, the higher the interest rate will be.
You may also be penalized if you fail to file Form 941, which relates to your income tax and FICA remittances.
Not Sending Out Tax Forms (W-2)
Copies of each employee’s W-2 must be sent out by January 31 each year—that means in the mail by January 31. These need to be sent to the employee as well as several other parties. Another common mistake employers often make is forgetting to send out Form W-2.
This mistake can add up in a large company. The IRS penalizes you $50 for each form you fail to send. If you have 10 employees, that could result in a fine of $500. 100 employees would result in a fine of $5000. The fees can add up quickly.
There are several different classifications for workers, but the main ones an employer needs to focus on are “contractor” and “employee”. Misclassifying workers as 1099 contractors can result in a number of fines and penalties. The IRS and various state governments have been trying to crack down on employee misclassification.
With the new World of Work and the increase in contingent workers and 1099 contractors, this is becoming an even bigger problem for employers. Up to 30% of employers are misclassifying their employees.
If the IRS determines this worker is actually an employee, you’ll be responsible for paying all of the tax you should have withheld. If the dispute drags on, this can mean paying back-tax for multiple years, which could cost you thousands of dollars.
The Toll of Payroll Mistakes on Your Employees
One of the more “hidden” costs of payroll mistakes is the toll it takes on your staff. If payroll is constantly being administered incorrectly, employees may need to deal with overages and shortages in their pay on a regular basis.
More than half of U.S. employees have encountered payroll problems. With 64% of Americans living paycheck to paycheck, they are not very forgiving when it comes to paycheck errors or late payments. It only takes one payroll mistake for employees to lose trust and decide to leave the company. 24% of employees will look for a new job after the first payroll mistake with another 25% choosing to leave after a second issue.
When this happens, you will need to account for the costs of turnover and hiring. While it can be difficult to pinpoint the exact reasons for turnover, the way you handle payroll could be a factor.
If you need to hire employees to replace those who leave, you should consider how much of this additional cost is directly related to payroll errors. Would you need to hire if your payroll was handled more efficiently?
The Labor Costs of Correcting Errors
Unlike hiring and employee turnover, the costs of correcting your payroll mistakes are easy to attribute. When you add them up, you’ll realize each error is costing you more than the penalty you paid to the IRS.
If you need to call someone in to work overtime to get all of your Form W-2s prepared and mailed, those costs must be added to what you’re paying the IRS in penalties. Suddenly, your costs may have jumped from $500 to $1,000.
Get a Helping Hand with Payroll
Once you’re able to consider all the factors involved in payroll penalties, it’s easy to see just how much payroll mistakes are actually costing your global business.
The best way to avoid these costs is to work with an expert team. If you need a hand, get in touch with a professional employer organization in the US to explore your options for better payroll.