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The most common payroll errors and how to avoid them

Sep 22, 2023 | Payroll

Navigating the intricate world of payroll can often feel like walking a tightrope. One small slip can lead to costly errors and a cascade of complications. As businesses grow and regulations change, it becomes increasingly important to keep abreast of best practices in payroll management. Payroll software alone is not the answer, as it only performs part of the task in hand and still requires technical expertise to generate and verify the information going into the system.

In this blog, we delve into some of the most common payroll errors that businesses in Ireland encounter, so that you can sidestep these pitfalls and ensure your payroll runs like clockwork. Whether you’re a seasoned finance professional or new business owner, this guide aims to equip you with the information you need for a seamless payroll process.

Common mistakes in small business payrolls

Small business owners often tell us that they spend hours googling Irish payroll rules, but still feel confused and anxious about whether their payroll is accurate and meets their compliance obligations. This is hardly surprising given how important employees are to a business and the potential ramifications of getting their pay wrong.

If you have been feeling overwhelmed by your payroll, you are not alone. A recent survey found that almost 94% of British and Irish businesses have run into problems processing payroll in the last 12 months. On average, organisations are suffering from a mistake rate of over 5% every single month.

There are some common mistakes we see in payrolls:

Payroll error 1: Mistakes in past payroll submissions

In Ireland, employers are required to submit payroll data for each employee after the relevant pay period has ended. You must provide Revenue with information including the amount of pay; the payment date; and the amount of Income Tax, Universal Social Charge, and Local Property Tax deducted. The Revenue site contains more information about what is required from a payroll submission.

This real-time reporting has been in place since January 2019, so most employers are used to using the new process. You may file directly through your payroll software, create a file using your payroll software that you upload to ROS, or simply complete the return manually on ROS. Revenue accumulates the totals from each periodic submission, which is why there is no longer a requirement for an end of year submission (P35).

We sometimes see instances where an employer has filed historic payroll submissions incorrectly, or not at all. If this is the case, it’s important to submit this information to Revenue as soon as possible, ensuring that correct tax calculations have been applied to all employee payments or deductions. Going forward, ensure that payroll submissions are filed on time. If you have made errors in payroll, it is possible to correct them following Revenue guidelines.

Payroll error 2: Mistakes deducting taxes from expenses

When a business pays extra money to employees for spending such as travel or working from home, or as a bonus or allowance, and doesn’t take out the necessary taxes, this can lead to problems. Some expenses are taxable and some are not. It is often the employee, not the company, who is liable for the tax on allowances and expenses. Where the correct taxes have not been deducted, Revenue may hold the company responsible for the tax liability.

Employers must have knowledge of the payment thresholds and tax liability of money paid to employees, and deduct the correct amount of tax if relevant. To fully understand how taxation applies to any given expense or allowance, review the Revenue guidance on:

  • employee expenses
  • round sum allowances
  • flat rate expense allowance
  • travel and subsistence (including exemptions for certain employments)
  • removal and relocation expenses
  • remote working

Payroll error 3: Using the wrong PRSI class

People who receive a salary or income in Ireland pay social insurance contributions. The contribution paid depends on their earnings and occupation, which is why this contribution is called Pay Related Social Insurance (PRSI). There are 11 different PRSI classes in Ireland (A, B, C, D, E, H, J, K, M, S, and P) but most employees in Ireland are paid on the A class PRSI code – A0, AX, A1, etc.

Social insurance payments and other entitlements depend on the PRSI class someone is in. If pay runs use the wrong PRSI tax code, it can trigger errors in the employee’s pension when they retire, meaning they may receive considerably less than they are due. Consider the financial impact of an underpayment of €50 per week over 20 years. This could result in a loss of €52,000 to an employee for an avoidable payroll mistake. Other social entitlements such as dental cover or jobseeker benefits can be refused if incorrect or missing PRSI filings have been made.

To avoid this error, ensure that employees are set to A class PRSI, and that the code changes automatically to A0, AX, or A1 if an employee’s pay is adjusted. Set proprietary directors to S class PSRI. This will report their class correctly to Revenue and remove the employer’s PRSI tax charge.

Payroll error 4: Not applying the correct tax credits

In Ireland, the amount of tax an employee pays can change for various reasons, including getting married, dividing credits with a civil partner, or receiving new tax credits (rental credit or carer credit, for example). Revenue provides updates on these changes through something called a Revenue Payroll Notification (RPN). Employee tax credits and tax band cut-offs (that split PAYE tax between the 20% and 40% Income Tax brackets) often change during the calendar tax year, and the RPN with them.

If you don’t use the latest RPN when calculating staff pay, you could be taking too much or too little tax from their wages. This could lead to an unexpected tax bill or unclaimed refund. To avoid this situation, always download the most recent RPN for each employee before you process their pay, ensuring everyone is taxed correctly.

Payroll error 5: Not paying the correct holiday entitlement

In Ireland, all workers – whether full-time, part-rime, temporary, or casual – have the right to paid time off, also known as statutory entitlement. There are different ways to calculate leave entitlement, and some employers use a calendar year (January to December) rather than the statutory leave year of 1st April to 31st March. There are three calculation methods recommended by the Workplace Relations Commission (WRC). Method 3 is how part-time worker leave is usually determined:

  1. 4 working weeks in a leave year in which the employee works at least 1,365 hours (unless it is a leave year in which he or she changes employment)
  2. 1/3 of a working week per calendar month that the employee works at least 117 hours
  3. 8% of the hours an employee works in a leave year (but subject to a maximum of 4 working weeks)

What many employers do not fully understand is that employees continue to build up their statutory entitled while they are on leave – which includes annual leave, maternity leave, parental leave, force majeure leave, adoptive leave, or the first 13 weeks of carer’s leave. Because some companies forget or miscalculate this, workers can be paid less holiday money than they are entitled to. If employees take the issue to the WRC, the company could be made to pay backdated holiday pay. If holiday pay has been miscalculated for a long time or across a large workforce, this could be a significant amount of money.

For this reason, companies should have a clear method for calculating holiday pay for both part-time and full-time staff. Make sure this is in line with the employee’s contract and follows Irish law, specifically the Organisation of Working Time Act 1997. This will ensure everyone gets the holiday pay they’re entitled to.

Consider outsourcing your payroll to avoid these and other mistakes

Navigating payroll complexities is crucial for any business, because even minor errors can grow into significant issues. Whether you’re an experienced business owner or new to the field, it’s vital to pay close attention to your payroll management. This blog has provided insights into some common payroll mistakes, but knowing about them is just the first step. You also need to take the appropriate actions like downloading the latest Revenue Payroll Notifications, monitoring PRSI codes, and accurately calculating holiday entitlements. By being proactive and careful, you can avoid the potential legal and financial issues that come from making payroll mistakes.

If you are concerned about your payroll and would like to outsource the process to an expert in Irish payroll, we can help! Our service is secure, accurate, timely, and confidential. Get in touch today to learn how our tailored services work and how much time and money we can save you.