Home Business What Business Owners Need to Know About the True Cost of Payroll Errors

What Business Owners Need to Know About the True Cost of Payroll Errors

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Virtually every business owner knows that payroll errors can be a significant problem. However, a business could easily prevent such errors by switching to a new payroll management solution designed for maximum accuracy.

However, some business owners nevertheless put off this task. It’s not uncommon for business owners to do so because they fail to appreciate the actual cost of payroll errors.

Don’t make this mistake. Even a seemingly minor error can have major consequences. If your current solution fails to offer thorough protection against common mistakes, the following example will help you better understand why you need to upgrade to a new system.

A ‘small’ error costs $42k

The 2017 case of Castro v. Precision Demolition LLC arose due to an employer failing to pay an employee $608.05 in unpaid overtime. Unfortunately, no one at the company caught the mistake early.

As a result, the employee brought the company to court. The company was ordered to pay the employee $1,216, adding penalties to the amount of unpaid overtime that was due.   

However, that sum was very small compared to an additional amount the company was ordered to pay. Initially, the employee also requested that the company pay them an additional $114,000 as reimbursement for attorney fees. While the company didn’t end up having to pay that much, they were eventually ordered to pay $41,333 to cover the cost of the employee’s legal representation.

That may sound difficult to believe, but it’s a very real example of the cost of payroll errors that occurred as recently as 2017. Examples like this clearly illustrate the importance of using a payroll management system that ensures errors are unlikely to occur, and if they do, they’re caught early.

Adding Up the Cost of Payroll Errors

While most payroll errors probably won’t cost as much as the above example suggests, costly errors are still a relatively common problem. The IRS estimates that approximately 40% of small businesses pay an average of $845 every year due to such issues.

However, that sum doesn’t necessarily reflect the true cost of payroll mistakes. That number merely represents the direct cost of correcting a payroll error. It doesn’t account for the labor costs associated with addressing these situations. Correcting a payroll error may require additional overtime, or could prevent an employee from focusing on other valuable tasks.

Additionally, payroll errors can have a profoundly negative impact on employee engagement. Understandably, employees won’t be happy if you fail to pay them what they’ve earned. This can have lasting impacts on your business’s reputation and overall company culture. It’s impossible to calculate the total cost of such challenges.

None of this is meant to scare you. It’s simply meant to serve as a reminder that you can’t ignore the importance of taking all necessary steps to guard against payroll errors. Setting aside time to upgrade your payroll systems now can save you thousands of dollars (if not more) in the long run.

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Adam Torkildson

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