How Pay Data Errors Snowball and Cost You Money

Posted by Pacific Timesheet on Feb 26, 2014 7:00:00 AM

errorsAn employee forgets to properly log his sick time for when he was out on Monday. Because he’s in a rush on Friday he submits a timesheet that incorrectly says he worked on Monday. His supervisor is busy and signs the time card without checking. The time card information goes to payroll and gets processed. The employee gets a paycheck the next week showing a vacation balance that's 8 hours too high, and 8 hours of regular time he did not work. 

Companies Lose Money, Time and Productivity

Employee timesheet errors are rampant in some organizations. They can happen when employees take time off but code it as jury rather than vacation. They might receive a pay differential when they work in another cost center but fail to code their hours with the right cost center number. Employees can accidentally under report work hours, or when their supervisors are not paying attention, over-report work time. Once you process these errant hours and pay employees, you now must correct these mistakes and any additional errors they create.

How much does it cost to correct pay data errors? A lot.

First, all of these errors will create the need for FICA corrections, and in some cases you will need to file IRS Form F941x which requires detailed explanations of every correction. If your FICA underpayment is greater than or equal to 2% of your total FICA obligation, you will owe penalties and interest if you do not correct errors and make these adjustment payments with your next quarterly return. 

Another area where time card errors uncorrected will hurt is for hourly worker defined contribution amounts.  These are calculated based upon hours worked.  Any errors not fixed by year end will be even more expensive to correct. 

All of these errors cause even more damage to your business, not only rippling through an employee's entire paycheck, but infecting your accounting systems, accounting costs, billable hours and invoices. All of these errors need to fixed.

Fixing when employees lose money

The Department of Labor recently made clear that companyies are responsible for correcting hours errors:

“In such circumstances, such errors or omissions may result in an initial payment to employees of less than 1/26th of their annual salary. The Company has to pay adjustment processes for correcting employee time-entry errors or omissions.”

When employees get shorted hours for time he actually worked, the company still owes him pay for those hours worked, even if timesheets do not accurately reflect these hours. Managers’ and back office personnel’s time expended on fixing time cards and making pay data corrections all add up to a one-two punch: 1) more adminstrative costs and less profit for the company and 2) lost income for the employee. All of these errors must be fixed or companies can be subject to penalties and fines in labor audits or employee law suits.

Tax errors that must be fixed

According to the Journal of Accountancy, it is true that employee tax errors found in the same year are easily corrected.  However, corrections that need to be made after the calendar year ends are more complicated and require refiling corrected W-2 forms with the corrected FICA tax that must also be filed with the employee and Social Security Administration. The type of procedures used will depend on what needs to be corrected:

  • Whether it's for FICA taxes or withholding
  • Whether the mistake is caught before or after the end of calendar year of wages paid
  • Whether there was an overpayment or underpayment of taxes.

Employee Individual Tax Problems

When there are errors, the company is not the only injured party. Employee W2 forms at the end of the tax year will have errors. These in turn can lead to errors on employee individual tax return filings. Depending upon the type of errors and when they were made, correcting them might affect the employee’s prior-year tax return. In this case, employees will have to file amended returns and possibly pay penalties and interest to the IRS. All of this of course is not good for employee morale.

What's the answer?

Cloud-based timesheets reduce errors, fraud and boost productivity

Most of these problems go away when companies use a cloud-based time tracking system. Operations and payroll managers are catching on to the fact that automating with cloud timesheet software not only increases accuracy in capturing timesheet data, but significantly reduces the number of employee time tracking errors. In a future post, we will explore how errors can be reduced by automated timesheet software.

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Photo Credit: nickwebb

Topics: payroll, Timesheet Software, payroll time tracking

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