Organizational Wellness

Master Payroll Correction: A Guide to Error-Free Payroll Processing

Last Updated Nov 12, 2024

Time to read: 9 minutes

Did you know that most companies make 15 payroll errors per pay period? While making errors is only human, that’s a lot of mistakes that can pile up during each and every pay period. Some of these errors may be small, but occasionally it can have more serious consequences that affect your employees and your brand.

To make sure everyone gets paid properly, it’s important to master a quick fix.

Payroll corrections are a way to repair any errors that might happen when you’re sending out an official payroll. Maybe someone was listed with the wrong deductions, or a worker didn’t get their overtime included. Quickly fixing these issues can help your company’s reputation and keep your employees happy. Here’s how you can master these vital payroll corrections!

The Importance of Error-Free Payroll Processing

Correct payroll processing impacts your organizations’ finances and reputation. Each payroll error costs about $291, according to a study by EY. If your team is making an average of 15 errors, payroll processing can cost you as much as $4,365 — every time.

On top of costs, consistent payroll errors hurt your company’s employer brand, complicating retention and recruitment. Job hunters won’t seek out businesses known for making mistakes, and that can make it harder to attract new talent.

And repeat pay issues can lead to poor retention rates as employees tend to leave when payment issues become a pattern. Payroll errors also hurt your employees financially. Bungled compensation can threaten their ability to pay for necessities, like housing and food or healthcare and childcare. As a result, these errors can also take a toll on their mental wellbeing, undermining trust and job satisfaction.

As a real world example, consider the grocery store Asda, which made an estimated 11,000 payroll mistakes in 2022. Some left employees underpaid by more than $613 in a single month! This forced its employees to skip meals, take out loans, and visit food banks in order to survive. That’s not the employee experience any HR department wants to deliver.

How to Avoid Three Common Payroll Mistakes

Fortunately, most of the common payroll errors are easily avoidable with the right information and tools. Most of these mistakes fall into three main categories:

Payment Miscalculations

Miscalculations can occur when wages aren’t correctly added, especially in cases involving overtime, time off, or deductions. This can result in overpayment or underpayment, particularly with overtime. Correcting underpayments usually involves issuing an additional check, while overpayments may be deducted from future pay. Payroll software can help you prevent these issues by automating calculations.

After you identify a payment problem, an underpaid individual is typically issued an additional check right away. For overpaid employees, you can’t necessarily get that money back, but you could deduct that amount on a future check. To avoid this problem in the first place, it can help to have payroll software help your team calculate every one’s pay automatically.

Misclassifying Employees

Every worker at your company has a legal classification. The most common groups include full-time employees, part-time workers, and independent contractors. Each category is entitled to different rights and types of pay. For example, part-time workers are eligible for overtime under the Fair Labor Standards Act (FLSA).

Sometimes companies misclassify an employee, and that can lead to withheld wages and lost benefits. It can also lead to tax withholding problems, and that can actually result in legal action. About 12% of companies who made this type of error were sued by a regulatory body, and the average fine for the suit was $5,200.

You might regularly perform payroll audits to go through all of your workers’ information and make sure it’s all correct. These check-ins can help you avoid making errors in the first place and avoid legal repercussions.

Incorrect Tax Withholdings

Employees’ W-4 forms can help you navigate tax withholdings, but errors can still happen. Such withholding issues might cause employees to overpay or underpay taxes, especially with unemployment taxes. Often, overpayments can be refunded, while underpayments can be balanced in future checks. Using tools to track withholdings and reviewing your payroll provider regularly can help minimize these errors.

Correcting Payroll Errors: A Step-by-Step Guide

While avoiding payroll mistakes is ideal, having a plan for quick corrections can help you act fast if you do encounter an issue. Following these steps can help you handle payroll errors efficiently.

Step One: Identify and Define the Error

The first step is to know what went wrong. Was someone underpaid? Did someone not get their benefits? Once you identify the problem, you can outline the next steps.

Step Two: Communicate

Next, let everyone involved know about the problem and your intended solution. Typically, you’ll want to reach out to the financial department and any affected employees. For example, if you underpay a worker, you’ll communicate with the company accountant and the individual with a smaller check.

When you let a team member know, consider having a quick conversation with them. Verbally explaining what went wrong helps the employee better understand and helps you show empathy. Consider following up in writing and establishing next steps after this meeting.

Step Three: Correct the Error

The next step is to quickly resolve the problem according to the plan you made. The exact type of error will determine how you end up needing to make the correction. You might need to send an employee additional pay or refile a form. Consider working with the financial department to make sure all protocols are met.

Step Four: Follow Up

After you make the correction, let everyone involved know it’s been fixed. A payroll correction letter can reassure employees that their pay has been corrected.

Writing a Payroll Correction Letter

A payroll correction letter can be sent after you meet with an employee or at the end of the process to document the situation. The message should clearly define the error, explain the solution, and express empathy. Here are the key elements to include:

Define the error. Let the worker know exactly what went wrong and how it happened. This explains the situation to them and reassures them that you know what to do. Even if you had a verbal conversation, it’s helpful to open with this brief summary.
Explain how you’re fixing it. You might outline the next steps your department is taking or what you have already done. Your plan could also include what you’re doing to prevent a future incident, including when you plan on having the error fixed.
Apologize. Taking time to empathize with the worker can be helpful. This error could really inconvenience them. An apology can help show that you know this and want to make things right.

Put together, an email you send regarding payroll issue might look something like this:

Subject: Correction to Payroll Error

Dear [Employee’s Name],

I’m writing to inform you of an error we recently identified in your payroll. After reviewing your recent pay statements, we noticed that [describe the exact nature of the error, such as "an incorrect calculation in your overtime pay" or "a deduction that was applied in error"]. This issue occurred due to [explain briefly how the error happened, for example, "a technical glitch in our payroll software" or "manual input mistake"].

We sincerely apologize for this oversight and any inconvenience it may have caused you.

Our payroll team is currently working to correct the error. You can expect the difference of [amount] to be reflected in your next paycheck, which will be issued on [date]. Additionally, we’ve reviewed our processes to ensure this won’t happen again. Moving forward, we’ll implement [describe preventive measures, such as "additional review steps before payroll submission"].

We understand that timely and accurate payment is critical, and we apologize for any stress this may have caused. If you have any questions or would like further clarification on this matter, please don’t hesitate to contact us. We are here to ensure everything is corrected swiftly.

Thank you for your understanding and patience.

Best regards,
[Your Name]
[Your Title]
[Company Name]

Utilizing Payroll Correction Forms

Sometimes you don’t spot the error until an employee points it out to you. To streamline corrections, consider creating payroll correction forms that allow employees to report issues easily. This allows your workers to fill out a sheet and alert you to a potential problem. These forms should be easily accessible and may include:

Employee name
Employee department
Date and pay period
Employment status (this is particularly important when using contractors)
Inquiry type (it may be helpful to include a list of potential errors that the employee can check off)
A space for explanation
A space or invitation to include a copy of the paycheck
Signature

Preventing Future Payroll Errors: Best Practices

While making errors will inevitably happen, aiming for perfect payrolls is the goal. Here are some tips that can help you prevent future problems and avoid the additional workload of making a correction:

Conduct an Audit

Consider having someone at your company or a third party perform a payroll audit. The auditor will delve deep into your processes and point out where errors might be coming from. This gives you a solid understanding of where to base your changes.

Invest in the Right Payroll Software

Payroll software makes it easier to correctly run reports and distribute pay stubs, while also helping remove human error. While there are many options available, not all software is the right fit for your team. Consider spending time evaluating options to determine what best meets your company’s needs.

Improve Communication

Sometimes the problem with the payroll actually comes from communication issues. Boosting your communication between your teams and software providers can actually prevent errors. Consider having regular check-ins with your payroll team or your software partner to make a plan to avoid future mistakes.

Supporting Your Employees with Wellness Programs

Payroll errors can be anything from inconvenient to costly, and they can undermine the trust your workers have in you. Ultimately, avoiding these mistakes helps you make sure that everyone is paid correctly. Ensuring that everyone at your company is fairly compensated is an important piece of the retention puzzle.

However, payroll is just the start of compensating your employees. Workers also want to work somewhere that focuses on their wellbeing. In fact, a full 93% of workers consider their wellbeing at work to be equally important to their salary, according to Wellhub research. Providing wellness programs your teams love can help you actively boost retention. People want to be somewhere where they’re cared for holistically, not just financially.

Ready to get started with wellness? Talk to a Wellhub Wellbeing Specialist today!

Company healthcare costs drop by up to 35% with Wellhub! (* Based on proprietary research comparing healthcare costs of active Wellhub users to non-users.) Talk to a Wellbeing Specialist to see how we can help reduce your healthcare spending!