Avoid these Payroll Compliance Mistakes

. 7 min read
Avoid these Payroll Compliance Mistakes

In India, payrolls are generated using traditional methods and are often prone to human errors that may lead to serious delays in payouts. There may not be adequate technical knowledge or expertise guiding the HR staff in such enterprises. However, most small and medium businesses and start-ups are turning towards intelligent and tech-backed software to manage payroll operations and carry all payment-related operations through such payroll management software.

Besides, payrolls are one of the most important moving parts of a business. It requires a huge compliance procedure to meet the audits and industry standards, and it also needs to offer a smooth flow for all your employees. In this respect, there is a wide range of issues common among businesses.

The following is a list of all the ​​Common Payroll Compliance Mistakes That Businesses Should Avoid in the long run:

1. Misclassification of Employee Categories

Companies have different categories of workers- full-time, temporary, and freelance contractors. The variety in employees leads to issues in payroll. A common mistake is the wrongful classification of the employees leading to a lapse in the legal requirements of their salary structure.

payroll written on the table with business team working

2. Optimising your Administrative Staff

Many times, the payroll staff is overworked. Small businesses conduct payroll operations in-house and do it manually. Punching payroll manually requires a great amount of paperwork and is an administrative burden for the HR staff. It is essential to optimize your administrative team responsible for payroll generation to avoid redundant payments and save your company budget.

3. Improper Payroll Documentation

Improper documentation of payable hours, overtime, and rates are common human errors businesses encounter, especially if they have a manual payroll process. These errors cause unforeseen delays in vendor payments and create various issues for the HR and Finance teams. It may also lead to poor employee relations.

4. Transitioning to a Payroll Software Setup

Not all payroll programs will be compatible with the payroll parameters of your employees. Moreover, there is a wide range of options to choose from. Most payroll generation software requires arduous data work on the back end, which is technical and may lead to issues within your HR team. Upgrading to an intelligent, easy-to-use payroll system will help your business manage payrolls efficiently in the long run.

5. Improper Calculation of an Employee’s Absence

Tracking the employee's vacation and sick days manually is a cumbersome task. Companies using paper time cards or digital sheets for recording an employee’s leave days can make the company prone to human errors. Besides, tracking employees' absences is necessary for effective planning and productivity. To have employees' absence data in digital format helps in finding a suitable replacement for a particular time.

india's no.1 staff management app

6. Improper Payroll Deductions

In any business, employee payroll deduction is probably the most complex part of the payroll process. Many taxation laws apply to that deduction and these need to be thoroughly updated to suit the size and nature of the business. It is one of the most predominant compliance errors businesses make in this respect.

7. Improper incorporation of Overtime data

One of the most common errors in payroll generation stems from calculating the overtime hours and the payable thereof. Usually, companies offer their overtime pay guidelines depending on which payrolls must be adjusted. It requires active engagement from the administrative staff involved in acquiring employee data and generating the payroll thereafter.

8. Continuous Upgradation to meet the Compliance Standards

As we know, payroll rules and regulations change quickly. There are annual rules that showcase how payroll should be processed either on the state or federal level. Although business typically stays updated with regulatory changes that happen, many a time, too much information leads to compliance gaps.

Fringe Benefits documents with clipboard and calculator

9. Mistakes with Fringe Benefits

Businesses make the mistake of not reporting the fringe benefits they offer their employees as a part of payroll. These mistakes could be company-related transportation and accommodations, vacations, gift cards, stock options, healthcare, etc. Also, many a time, there are errors in reimbursements incurred for official purposes that lead to employee disputes.

10. Inaccurate Calculation of ESI and EPF Contributions

Businesses must register and file reports with all the concerned authorities on matters of Employee Provident Fund and related ESI contributions. It is one of the most important parts of the salary that must be thoroughly reviewed.

There are multiple ways to avoid common compliance payroll mistakes as there are multiple options available for businesses for proper payroll functions. In-house software or cloud-based programming is a good option. These alternatives provide timely payment of payrolls and are reliable. Also, they will be a great help to businesses in classifying the payroll cheques of their employees. Visit OkCredit to know more ways to avoid payroll compliance mistakes for your business.

Also Read:

1) Pros and Cons of Cheque payments
2) All You Need to Know About Electronic Checks
3) Differences between E-checks and Paper Checks
4) Digital Payments: Definition and Methods

Stay updated with new business ideas & business tips with OkCredit blogs in English, Hindi, Malayalam, Marathi & more!
Download OkCredit now & get rid of your bookkeeping hassles.
OkCredit is 100% Made in India.


Q. What is payroll compliance?

Ans. Payroll compliance is the steps that every employer needs to take to abide by the tax regulations, hour and wage rules, and other requirements related to payroll. These steps help maintain the proper form for each employee, correct tax codes for the business, withholding and filing taxes, observing the state and federal rules, and more.

Q. What is the cost a business has to pay for non-compliance with payroll?

Ans. When an employer fails to pay employees on time, files payroll taxes late or incorrectly, and keeps a sloppy and incomplete payroll record, he must face the consequences. Some of the common consequences that employer has to face includes:

  • Back payments of the missing pay
  • Interest and penalty
  • Fines and audits from the government agencies
  • Legal expenses
  • Loss of irreplaceable data
  • Decrease in employee morale

Q. How to ensure accuracy in payroll?

Ans. The payroll accuracy eliminates the chance of mistakes and avoids any heavy fines and penalties. Businesses can keep in mind the below-mentioned points for proper accuracy in payroll:

  • It is needed to classify all the workers correctly.
  • Businesses should keep a meticulous record of payrolls and employees.
  • Companies can automate the payroll with various software programs.
  • Companies should be informed about the latest payroll regulations.
  • Businesses have to audit payroll processes regularly.
  • Integrating the payroll with timekeeping will benefit the administration.

Q. Why is it important to have payroll compliance legislation?

Ans. It is the significant responsibility of the employer to comply with the payroll regulations because:

  • It ensures employees are paid correctly for the work they do.
  • It funds many social service schemes like unemployment and medicare.
  • It improves the workforce morale.
  • It helps in reducing the risk of penalties and lawsuits.

Q. Why TDS and professional taxes are deducted from the payroll?

Ans. As per the Income Tax Act 196, the tax deducted at source (TDS) is a means to collect indirect tax. The TDS rule applies to all the employees who fall under this slab. The professional tax is collected from the monthly salaries of the employers. The employer has to deduct a specific amount of tax before making the full payment to the employee.