Top 8 Most Common Payroll Processing Mistakes in Malaysia
Paying your employees may seem like an easy task, but there are common mistakes that happen, that have costly consequences. Not only can payroll processing errors be costly, they can also add several days with unnecessary work for your payroll department. And this doesn’t take into consideration the potential damage to employee relations and morale.
Although it takes place behind the scenes, every good business owner knows that payroll processing is integral to their operation. Unfortunately, that also means any problems in the process, however minor, can affect almost every level of a business.
The repetitive nature of making these payments once a month can also increase the chance of mistakes happening. This is because many companies still use manual payment systems that are monitored by humans.
Common Payroll Processing Mistake
1. Miscalculating overtime wages
Specific guidelines must be followed when determining overtime pay and miscalculations can be costly. Employee litigation has been a rising trend in recent years where workers have claimed to be misclassified and treated as “exempt” employees and therefore not entitled to overtime.
You must calculate overtime wages correctly. Overtime wages are different than regular wages. If you don’t pay the correct overtime rate, you might owe back wages, penalties, and interest.
2. Poor record keeping and data entry
Payroll is ultimately built on small details, at every stage of the process. Nowhere is this rule more important than in record-keeping: from inducting new employees into the payroll processing system, to maintaining their information for audit purposes. The dangers of payroll record-keeping mistakes are twofold: firstly, the effects of innocuous errors can be magnified if left unaddressed – and have serious knock-on effects for the pay-cycle, and secondly, tax authorities may well penalise businesses for the act of poor-record keeping itself.
3. Misclassification of worker
The classification of employees can be complicated and confusing, especially when the process takes in part-time and full-time staff members, temporary staff, and independent contractors. Tax authorities tend to take employee misclassification seriously, but it’s easy to misclassify employees accidentally without seeing immediate effects.
Large companies often have different classes of employees that are paid differently. For example, there are full-time employees that are paid a fixed amount each month and there are those that are paid hourly. There are even employees that work on a freelance or contract basis, as well as those who work independently.
4. Unsecure personal data
Payroll information should never be disclosed to anyone outside of the payroll department or the upper management. It’s important that such confidentiality is maintained and that payroll processing is handled in a secure environment. When it isn’t employees are open to identity theft and more.
Salary data should not be leaked to anyone outside the dedicated payroll executives and the upper management. Such data can compromise employee privacy and may be used against them in negative ways by outside forces, as well as internally. As such, there must be some measure of security on the payroll processing data to limit it only to those who need to know. A payroll software with limited access level can help minimise this risk.
5. Wrong Tax Calculation
Tax rates change all the time and may cause payroll processing issues. The rates you used when you started paying employees might not be the correct rates now. When you pay the wrong rate, you will have to make up the owed taxes, plus penalties and interest. Make sure you regularly check your employment tax rates. Many tax rates are updated every year.
All companies are required by the Income Tax Act to make the necessary deductions from salaries payable and forward them as the individual’s personal income tax. The calculations for each individual employee has to be carried out according to the amount that they earn and the formula provided by the Inland Revenue Board of Malaysia.
6. Missing important deadlines
It is important to mark your payroll calendar and report and deposit and payroll taxes to federal and state agencies on time. Late deposits can result in hefty penalties and interest charges.
One of the most basic duties of a payroll department is to meet a number of important dates and deadlines on the tax calendar. Don’t neglect these tax basics: from understanding when the tax year starts and ends, to meeting remittance deadlines, every member of your payroll team should know what needs to happen, and when – or risk incurring compliance penalties.
7. Not having important backup records
Should your HR manager or the individual responsible for payroll be on vacation or out sick, the IRS and the state still require to receive payments on time as do employees waiting for paychecks. You should have more than one person capable of both understanding and handling the payroll processing functions of your organization if and when this instance arises. In addition, if the computer is “down” for whatever reason, you need to have a manual backup system for handling all payroll processing functions.
In order to ensure that the company’s accounts are in order, payroll data needs to be well kept and protected. They will come in handy for internal and external auditing exercises. Many times, payroll processing data isn’t backed up properly by the accounting or administration department. This will lead to problems in data retrieval, such as in cases where there is a salary dispute between an employee and the company.
8. No Regular Payroll Audits
Internal and external payroll audits should be done regularly in order to avoid any unintentional mistakes in the system, such as problems in data entry. Additionally, audits are able to prevent potential fraud whereby employee details or remuneration might not be entered accurately.
It is ideal for every company to conduct payroll audits, whether in-house or third party, to ensure optimal performance of payroll processes. In particular, payroll audits significantly curtail both financial and regulatory risks. It allows your organisation to deal with problems proactively via continuous adjustments and corrections.
Truth be told, no system is flawless. There are many opportunities for mistakes, and there will be mistakes. Ultimately, if you are looking to scale your business, you should be ready to confront perplexing payroll problems.Nevertheless, payroll audits greatly reduce unintentional errors and fortify financial controls over your business. All in all, payroll audits should be a regular function of your payroll process.
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