5 Best Practices for a Successful Payroll System

Author : Janice M. Morrison

35% percent of the average HR department’s time is spent on payroll alone (Sage). In order to maximize the efficiency of your payroll system and prevent errors, you need to follow these best practices for managing your payroll system.

1. Make Your System Transparent
One of the easiest ways to prevent accidental time theft, mis-classification of employees, underpaid taxes, and other common payroll issues is to produce a pay policy and put it in writing. Post it prominently and provide a copy to every employee.

The policy should lay out:

  • How employees are classified. Wrongly classifying employees as exempt, nonexempt, or contract can put you in violation of the Fair Labor Standards Act and place you at risk of a lawsuit or audit.
  • How wages, salaries, promotions, and raises are calculated; how the pay process works; when changes to payroll go into effect; and how the company deals with payroll mistakes.

2. Avoid Manual Processes
Are you still calculating payroll by hand or in an Excel spreadsheet? The American Payroll Association estimates that error rates from manual payroll processes can cost you 1% – 8% of your total payroll. The more you automate your payroll system with a payroll services provider or payroll software program, the fewer errors you will have to pay for out of pocket.

Simple ledger mistakes are frequent in manual systems due to its reliance on humans to transcribe hours and calculate wages. These systems are also easy for employees to manipulate.

3. Regularly Audit Your Processes
Whether you utilize a manual timecard system or one that is computerized, you should audit your processes at least once a year. Even automated systems can produce errors. If these are not caught in time, they can wind up costing you. You may overpay an employee due to a math error, incorrectly classify a new employee’s tax status, or fail to increase the pay rate of an employee who was promised a raise.

Double-check all of your paperwork and processes to ensure everything is functioning properly.

If you are using add-ons or plugins to integrate your payroll software with your time and attendance system or accounting program, make sure that all of the connections are transferring data correctly.

4. Prevent Time Theft
Time theft occurs when employees intentionally mis-record their hours, take overly long breaks, spend work hours on non-work-related activities, or use “buddy punching” to check in when they aren’t present.

Implement a check-in system that automatically records an employee’s hours when they sign in or swipe their card. You can further decrease fraud by utilizing biometric sign-in hardware such as a fingerprint scanner.

5. Stay Up-to-Date
IRS tax tables and Federal and state labor regulations change from year to year. It is important that your knowledge of these regulations is current. You can download the latest tax tables from the IRS website. If you use payroll software, make sure that it automatically updates each year so as to keep you in compliance.

Pay particular attention to changes in regulations governing: income tax withholding, state unemployment taxes, child support withholding, and fringe benefit calculation and taxation.

The best practices for business payroll center around preventing errors and fraud that are commonly found in manual payroll processes. Transferring your payroll to a specialized software system or third-party administrator can keep your payroll in better shape. Whether or not you choose to go this route with your payroll, make sure that your process is transparent, that you audit it regularly, and that you keep it current with state and federal labor laws.

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