Payroll errors cause discontent among staff and pose compliance risks. Learn what payroll errors are, who is responsible for them, and how to fix them.
Employees rightfully feel disappointed when their payslips reflect a smaller net salary than what they were owed for the month. Especially if it turns out that the underpayment resulted from a payroll error.
While your employees can be more forgiving of payroll errors, the Kenya Revenue Authority will come down hard on you if your errors cause you to remit less PAYE tax than you should.
Regardless of perspective, payroll errors incur costs. It's essential to avoid them, and this article will guide you on how to do so.
What are payroll errors?
A payroll error is any mistake that results in the overpayment or underpayment of an employee’s salary. Certain payroll mistakes may result in missing the payroll deadline, leading to delays in salary disbursement for employees.
Payroll errors may stem from incorrect data entry, misclassification of workers, miscalculation of overtime, and errors in net salary computation, among other factors.
Underpayment of salary can significantly impact employees’ quality of life and ripple into their financial security. For example, it can reduce their food and entertainment budget and even more serious hardships caused by failure to pay their mortgage and service their other loans.
An overpayment isn’t necessarily beneficial to the employee as the money will have to be paid back. For the employer, neither outcome of payroll errors is favourable. They result in employee discontent, tarnish the brand, and invite potential tax evasion and compliance issues.
Employee dissatisfaction may manifest in increased absenteeism, reducing overall productivity and resulting in the loss of top talent. Talent loss is doubly costly as you will have to bear the unbudgeted costs of recruiting and training replacements.
What causes payroll errors?
Payroll is a complex process. It requires a lot of data input and the cooperation of different departments and systems. Beyond the competence of the people who process it, an efficient payroll process relies heavily on the system or software you use and the quality of the data you feed it.
Given the complexity involved, errors are common.Particularly in payroll processes involving manual data input and salary calculation.
What are common payroll errors?
Payroll mistakes can happen, whether you are a new business owner or a grey-haired veteran of payroll management. Here are the most common causes of payroll errors that you can watch out for at your company:
1. Misclassifying workers.
Labour law in many jurisdictions put a strict separation between employees and independent contractors. An employee is someone you hire, works exclusively for you, and you pay wages to regularly, they are subject to your rules and enjoy legal protections and benefits like:
- Minimum pay,
- Annual leave,
- Overtime pay,
- Compassionate and sick leave.
They also pay PAYE tax if they are not exempt. Independent contractors and consultants, on the other hand, run their own businesses and only perform work for you when needed. They are free to work for different clients at the same time.
Independent contractors are responsible for their own tax payments. You are not required to collect taxes from them on behalf of the Kenya Revenue Authority. For this reason, misclassifying employees as independent contractors can put you in the crosshairs of the KRA.
Continuing with payroll errors could lead to conflicts with the KRA.
2. Using wrong tax brackets.
A salaried individual may be tax-exempt based on their income level. Individuals with low income are often exempt from taxes to ensure they earn a living wage. So they will be classified as tax-exempt on the payroll.
In Kenya the PAYE threshold changes with inflation and the growth in salaries. Sometimes a person loses their PAYE exemption when they get promoted. If you neglect to apply the correct PAYE rate on them, that constitutes a payroll error, which might attract a fine from the KRA.
Using incorrect PAYE rates may result in overtaxation or taxation when it is unnecessary. That can aggravate your employees, whose welfare might be affected by the income loss.
Another payroll tax error is failing to remit PAYE on time. In Kenya, the KRA requires employees to remit PAYE deductions before the 9th of the following month. Missing this deadline is a costly payroll error because it invites a KRA fine.
3. Misentering important data.
Some payroll errors are down to pure negligence during data entry. You will either overpay or underpay the employee. An example is when a person earns a certain amount per week and you enter that amount in the computer as an hourly rate.
That payroll error will inflate the employee’s net pay by a large amount. Imagine if the person is not honest and decides to leave the company and not pay the money back. That can be very costly.
Even inconceivable payroll errors can occur at times. There are people who have failed to cash their cheques because their names were mistyped and even where the cheques were blank.
4. Using incorrect data.
Payroll errors can originate outside the payroll department, typically where data is sourced. If you get incorrect data, for example, your payroll will produce incorrect pay.
For instance, if supervisors in various departments miscalculate and submit incorrect overtime hours, it may lead to underpayment or overpayment. So it’s crucial to double-check your data before you use it.
There have also been cases where employees have supplied incorrect payment information. That includes supplying the wrong bank account. Such mistakes can be costly to rectify and can mean that the employee may lose their wages.
5. Ignoring garnish orders.
The law requires employers to comply with garnish orders issued against their employees. Usually these are issued by courts for spousal support and child maintenance.
Sometimes payroll clerks will forget to deduct the garnish amount and send it to the court-appointed recipient’s bank account. This constitutes an offence that could land the company in legal trouble. You could be asked to pay the amount from the company’s finances.
6. Using an incomplete payroll.
A payroll is a list of a company’s employees and their salaries. It can also include overtime worked, taxes deducted, and bonuses earned.
Maintaining payroll means making sure that everything is up to date, including the number of people that work for you and should be on the payroll.
A mistake that might happen is to forget to add new employees to the payroll on time. Certain payroll software may not easily rectify this issue, potentially resulting in delayed payment until the next pay cycle.
This payroll error happens a lot but it is hugely inconvenient for new employees who will be looking forward to their first pay cheque more than anyone in the company. This may necessitate borrowing money for transportation to continue commuting to work.
How can payroll accuracy be maintained
Payroll errors are costly and inconvenient for everyone concerned. They take time to rectify, cause unnecessary hardship on employees, and can set the company on the collision course with the KRA and the Ministry of Labour and Social Protection.
1. Review payroll data regularly.
Your payroll system is only as good as the data you feed it. Therefore, it's essential to conduct periodic audits of your payroll to ensure its accuracy. This includes making sure people who have left the company are removed from the payroll so you don’t keep paying them.
Regularly reviewing your payroll will help identify recurring errors, allowing for corrective action. Frequent human errors can mean that the people that enter data and process payroll are overworked or lack proper training.
2. Double-check payroll for errors.
Despite your best efforts, payroll errors will happen. Some even originate in other departments, like where the overtime hours were compiled. This highlights the importance of double-checking payroll before authorising it.
A simple tactic is to simply compare your payroll against the previous month’s. Verify the data where an employee’s net salary for the month is less or significantly more than last month’s. Certain figures may stand out on the screen due to their unusually large values
Double-checking is not a fun activity especially when you have a looming payroll deadline, but solving errors will often take more time and are costlier to fix.
At times, you may lack the resources to process payroll in-house. Consider whether outsourcing payroll will be beneficial. Before you go down that route, be aware of the pros and cons.
In most cases, though, the best way to minimise payroll errors is automation.
3. Use payroll software.
The best way to maintain accuracy and prevent payroll error is to use payroll automation software. Using the right technology will prevent human errors in payroll processing.
By integrating your payroll software with the other systems in your business, data transfer can happen without human intervention, which is the main reason for payroll errors.
For example, you can design your payroll software to communicate with your cloaking software so overtime is recorded and computed automatically.
Investing in a time tracking software will help keep a precise record of the hours worked. That does not remove the need for human oversight but it will greatly prevent payroll errors resulting from negligence and bad calculations.
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