Common Payroll Issues & Ways to Resolve Them

Payroll Issues

Accurate and timely payroll processing is vital to ensure your employees get their salaries correctly and on time. Whereas, delayed payments to staff can arise several other short- and long-term issues for your company. Efficient payroll management plays a crucial role in maintaining strong company-employee relationships and keeping their morale high. Ensuring statutory compliance in payroll comes as a significant obligation.

In a nutshell, a lot can go wrong with each monthly payroll cycle. Especially, if you do not pay attention to resolving payroll issues. This can lead to dissatisfied staff, compliance violations, and losses in the form of talent and cash due to penalties.

Whereas ensuring accurate, effective payroll management results in various benefits such as:

  • Employee satisfaction
  • Tax compliance assurance
  • Simplified and timely pay runs
  • Fewer chances of FLSA violations

Let’s now discuss some of the most common payroll problems businesses face across industries and solutions to rectify them.

Common Payroll Issues and Their Solutions

Following traditional methods for payroll processing

Using spreadsheets or other simple tools for processing payroll manually can be a cost-effective option and best for small businesses. However, these traditional, manual methods consume a lot of time and are prone to errors. Additionally, as your business grows and you get more employees on board, manual payroll management can create complexities leading to potential risks.

As you are prone to make mistakes using spreadsheets and cannot protect confidential data due to a lack of security, it is one of the significant payroll issues. The solution can be to use a payroll software application to automate the entire process or hire external payroll services.

Not being aware of regulatory changes

Business owners doing taxes on their own would wish laws and regulations never change. The reality, however, is that they do change, and then there are federal, state, and local rules that you need to comply with. In case you overlook any significant changes done in regulations, you end up calculating wrong payroll and taxes, putting you at risk of fines, penalties.

Great payroll software will get automatically updated according to the amendments done in regulations. Although it will make things a lot easier, you will need to train your staff for its appropriate utilization.

Poor recordkeeping

Know that payroll records should be maintained properly not only for business purposes but also for compliance requirements. Moreover, the Fair Labor Standards Act mandates businesses to keep records of employee remuneration for at least 3 years.

Therefore, even if you have a bookkeeper in-house, who’s just crunching numbers throughout their working hours, it would be better to use a payroll management solution, especially for accurate and compliant payroll records management.

Inaccurate pay

Every other day we read about data breaches in headlines, especially after the pandemic, data breach attempts have increased. For payroll purposes, you use highly sensitive data, including bank account details, social security numbers, postal addresses, etc.

If you do not have a secure system for managing confidential payroll data, you might be at a high risk of being exposed to a data breach. Therefore, you must create clear and comprehensive privacy policies and have a secure storage system for payroll records. In addition, stringent internal controls are vital to restrict access to this sensitive information.

Under or over payments

Think from the point of view of your employees. They don’t want to be underpaid, and you might feel a little uneasy asking them to return extra money when overpaid unintentionally. If left uncaught, these errors can lead to additional complications during year-end accounting, financial reporting, and while processing the W-2 form. Moreover, you or your staff would spend a lot of extra time out of your busy schedule to rectify these errors.

If you find an incorrect payment, discuss the same with the employee immediately. Take the required action without making them financially uncomfortable. However, you can prevent such a situation by using an automated solution for payroll issues. It will reduce the chances of data entry errors and calculation mistakes.


SMBs and even large enterprises employ a mix of workers incorporating temps, independent contractors, and freelancers in addition to full-time and part-time employees. If you are also doing the same, make sure you do not classify your employees incorrectly.

Categorizing an employee as a contractor by mistake can be problematic for your company and your workforce. For instance, an employee is generally entitled to perks and benefits, unemployment compensation, etc. Whereas, a worker on a contract basis is not. Therefore, you need to avoid such problems as these misclassification mistakes can lead you to pay hefty penalties.

No backup solutions in place

You can lose valuable data if your payroll system fails and you do not have a backup. Know that losing crucial data is equal to any other business loss. Hence, if you use a desktop payroll system, make sure to create a backup every cycle or have a replicated system of the same placed in another location to safeguard it against theft or mishaps like fire or calamities like earthquakes, floods, etc.

What better you can do is use a cloud-based payroll management system that automatically creates a backup of your data regularly; however, it is also vital to select a reliable service provider.

Payroll fraud occurs more commonly than you think and is a considerable threat to businesses. Let’s take an example of payroll fraud; suppose one of your employees does billing with more working hours than they actually spent. Here, an automatic employee timesheet management system can help. You can also use a comprehensive payroll solution to spot frauds a little more effortlessly. This can help you generate reports quickly and analyze the entire data to detect suspicious activities.


Another threat for your business is payroll diversion. Cybercriminals are increasingly sending phishing emails to obtain employee log-in credentials and then using the same to change payment information. Again, helping your staff become aware of such problems and training them to avoid such threats can help.

Costly payroll management

Many businesses find it challenging to pay high expenses of business administrative functions that include payroll. However, since there are very few opportunities to cut payroll processing costs, you can trim down the same by investing in a cost-effective payroll solution. With this, you can also free your staff, and they can spend this saved time on other value-adding business activities.

Moreover, today’s cloud-based payroll systems are even less expensive and address most payroll issues. They can handle almost everything, and you only need to pay a pocket-friendly monthly subscription fee. This eliminates the need to invest in computer systems, space, desks, and recruitment, and other relevant expenses.

How can outsourcing payroll help?

Many firms have their accounting or HR team handle payroll, which can keep them distracted from their core responsivities or make it challenging to handle both simultaneously. This might be the reason why many organizations choose external firms for payroll processing services and reap multiple benefits, including on-time payments making staff satisfied (leading to higher retention rates), assured tax compliance, etc.

Outsourcing payroll processing to a reliable firm can also help you cut costs because most outsourcing companies offer services at a fraction of the prices you might be paying to your in-house payroll team. Besides, if you have invested in a payroll system but lack expertise or knowledge to use it properly, a competent payroll outsourcing service provider can provide complete support, enabling you to leverage your software subscription to the fullest.

Cathrine Troyer is a content strategist and business tech writer working at Cogneesol - a leading firm in the accounting services landscape. She is passionate about writing on finance and accounting, small business growth, and entrepreneurship. In addition, she is contributing her skills, knowledge, and experience by helping business owners (from new, small businesses to large-size firms) via her informative and fact-full articles and blog posts.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top