Ensuring accurate payroll processing is one of the most critical tasks at your company (as your employees who enjoy getting paid consistently and on time will no doubt agree). But there's much more to payroll than ensuring funds hit your employees' bank accounts at the right time.
You must follow complex tax regulations and strict compliance requirements when processing payroll. The slightest error can lead to significant legal and financial challenges, even if inadvertent.
When you add global payroll into the mix, it becomes even more complicated. Many international companies face the same challenges in their payroll process, but there are some ways to ensure that you correctly run payroll while complying with local laws.
Key Takeaways
- Global payroll management requires compliance with location-specific laws.
- Payroll errors can be reduced by implementing automation and a global payroll system.
- An Employer of Record (EOR) simplifies payroll processes and ensures compliance.
The Common Payroll Challenges in the U.S.
When running payroll in the U.S., you'll be operating under the oversight of several government agencies, including the Department of Labor, the Internal Revenue Service, and state organizations. These agencies are known for imposing fines and penalties for payroll and tax violations and any payroll compliance issues.
For example, the state of Massachusetts announced nearly $1 million in citations against five employers for violations of Massachusetts' sick time law and other worker protections. With the risk of such steep penalties, U.S. employers must be prepared to address any payroll challenges.
1. Payroll Errors and Miscalculations
Pay miscalculations can happen with either salaried or hourly employees. These errors can result in both overpayment and underpayment to employees.
Some common reasons for miscalculations include:
- Incorrect deductions, such as for Social Security or health insurance premiums
- Improper payments to employees who are on leave
- Inaccurate calculations for overtime work
- Missing the initial pay cycle for a new employee
It can take an organization days to correct a payroll error, which can be incredibly frustrating for employees, especially if they're underpaid or their pay is delayed. In addition to the financial impact on employees, payroll errors expose employers to potential penalties.
Solution: Human error and manually processing payroll are often to blame for these mistakes. The best thing you can do is implement payroll software with automation that can handle tax calculations, deductions, and overtime payments. Regular payroll audits can help you catch discrepancies, avoid compliance issues, and maintain employee satisfaction.
2. Failure to Retain Payment Records
In the U.S., businesses must keep payroll records for several years. Failure to retain records can result in fines and create headaches during audits.
The length of record retention varies by agency and the type of payroll record.
- Department of Labor:
- 2-year retention of records like time cards, wage rate tables, and work and time schedules
- 3-year retention of payroll records and collective bargaining agreements
- IRS:
- 4-year retention of employee tax records such as personal information, Social Security number, employment dates, and W-4s
- 4-year retention of forms 940, 941, and 1099
- 4-year retention of filed returns, fringe benefits, and expense reimbursements
(Note: This is not a complete list; you should consult a tax or legal professional regarding all record retention requirements.)
If your payroll records are disorganized, it can cause many issues. Companies that rely on manual data entry, paper processes, or scattered spreadsheets may later find that they don't have the required documentation or that there's a discrepancy in their data.
Solution: Utilize a payroll management system to store records and track data retention requirements securely. You'll also need to train your team so they know which documents have retention requirements and how to retrieve them during audits.
3. Errors Tracking Employee Work Hours and Overtime
As mentioned above, inaccurate payroll calculations are a common challenge. This often happens when work hours and overtime pay are tracked in different systems. Some companies even rely on manual tracking methods, such as filling out a spreadsheet or time card, which further increases the likelihood of errors.
Inaccurate time tracking can happen for many reasons, including:
- Overtime hours logged incorrectly
- Not accounting for travel time between work sites
- Working through breaks
- Requiring activities outside of regular business hours, such as training
Time tracking can be challenging for small businesses if they get bogged down collecting and verifying hours worked. It gets even more complicated for large companies with multiple locations and varying pay structures.
Solution: Use time-tracking software that integrates with your payroll system. Doing this ensures that employees' hours are accurately logged and paid correctly (including any calculated overtime). Ensure you have a clear policy for reviewing and approving overtime that complies with local labor laws.
4. Data Security and Payroll Fraud Risks
Payroll data contains highly sensitive employee information, such as Social Security numbers, addresses, and salaries. You may also store bank information, such as the employee's account numbers.
Cyberattacks are all too common, and bad actors may try to gain access to your payroll system through phishing emails. One wrong click can put your company at risk of a breach or compromise employee data.
Payroll fraud is also a serious threat to businesses. Fraud may be as simple as a falsified time card or expense report. On the more serious end, someone on the payroll team might add an unauthorized bonus or increase to an employee's paycheck.
Solution: Using encrypted payroll software and implementing multi-factor authentication (MFA), you can strengthen your payroll security. Train payroll employees so they know how to spot phishing attempts or other cyber threats.
You should limit payroll access to essential personnel only and create an approval process to double-check time cards, expenses, and wage/salary/bonus amounts.
5. Payroll Taxation and Withholding Errors
U.S. payroll taxes include federal, state, and even local tax requirements. Since tax calculations can change depending on the paycheck amount, pre-tax deductions, and the information entered on the employee's W-4, there are a lot of opportunities for error. Any mistake in calculating taxes and other required withholdings can result in non-compliance and audits — not to mention create issues for the employee.
Tax laws can change frequently, and you can face fines and penalties if you incorrectly calculate tax liabilities due to regulatory changes, so you’ll need to stay on top of that.
Solution: Payroll solution providers should stay up-to-date with any changes to tax rates. You should also collaborate with a tax professional to ensure you comply with all tax laws. In addition, maintain detailed documentation to comply with retention requirements and support your tax calculations in the event of an audit.
5 Common Global Payroll Challenges
Managing payroll for a global workforce introduces additional complexities for any business. While most of the challenges we just covered are universal, companies running an international payroll face additional regulations and logistical issues.
1. Compliance with Local and International Regulations
Every country has its own tax laws, labor laws, and reporting requirements. Payroll teams must understand the location-specific employment laws, including:
- Overtime pay requirements
- Pay frequency
- Mandatory contributions toward government benefit programs, like healthcare
- Employee severance requirements
In a recent survey, 63% of respondents cited compliance as their biggest global payroll challenge. Navigating the complexities can overwhelm businesses and expose them to fines if they commit errors.
Solution: Train your payroll team on regional regulations and keep tabs on evolving employment laws. Standardizing payroll policies (such as payroll cycles, tax reporting, and overtime policies) and using payroll software can help you better manage the process. An Employer of Record (EOR) ensures full compliance with local payroll regulations, saving you time and reducing risk.
2. Managing Payroll for Remote Global Employees
A global workforce means you must adhere to country-specific payroll laws, including frequency of pay (weekly, monthly, etc.) and mandatory bonus payments, such as 13th or 14th-month pay. You'll also have to factor in multiple time zones and banking holidays to ensure that money hits the employees' bank accounts on time.
Since payroll must be processed in multiple currencies, your team must navigate fluctuating exchange rates, making accurate payments more challenging. Additionally, international bank transfers often come with fees, adding costs you may not have budgeted for.
Solution: A global payroll system can support multi-currency payments and uses automation for currency rate calculations for each region. An EOR can also manage the cross-border payroll process for companies with international employees, ensuring everyone is paid accurately and on time.
3. International Payroll Tax Withholding and Social Contributions
Withholding requirements for taxes and social contributions (such as government benefit programs) differ from country to country. In addition to income tax, some countries require pension funds, healthcare programs, and unemployment insurance contributions.
Additionally, you'll have to keep track of location-specific reporting deadlines and any mandatory employer contributions. You must submit the required documentation to relevant tax agencies and remit any employee and employer portions of taxes and contributions.
Solution: Use payroll software that automatically calculates tax and other required withholdings based on the employee's location. Keep track of changes in tax regulations, or work with an EOR that can manage tax compliance and filings for you.
4. Protecting Sensitive Employee Data
Many countries or regions have global data protection laws you may need to adhere to. For example, the General Data Protection Regulation (GDPR) has stringent requirements for handling sensitive personal data for residents of the EU.
Violations and data breaches can result in severe penalties — up to EUR 20 million or 4% of global revenue, whichever is higher.
To meet regional data privacy requirements, organizations should:
- Ensure data security within payment and time-tracking systems
- Implement strong access controls and encrypt sensitive information
- Regularly review and update security protocols
- Conduct regular audits and risk assessments
Solution: For small businesses and companies without the legal and technical resources to ensure employee data security, an EOR provides a secure payroll solution by complying with mandatory data encryption, reporting, and other global data security requirements.
5. Ensure Proper Worker Classification
The rise of the gig economy has brought worker classification to the forefront for many companies, and complying with local laws is crucial for any business operating globally to avoid penalties.
Employee misclassification is a serious issue in many countries. If a business misclassifies an employee as an independent contractor, it can result in fines, back taxes, and legal action.
Employee classification regulations vary by country. However, some common factors include:
- How much the employer controls the individual's work
- Who sets the work schedule and location — the contractor or the employer
- If the contractor uses their own or company-provided equipment
Solution: Review local labor laws to determine the correct classification for each worker. If you're not sure, consult a labor or legal expert. An EOR can ensure proper worker classification for you, reducing the risk and associated misclassification costs.
EORs Simplify Paying an International Team
While a global team gives you access to a broader talent pool, managing international payroll can be complex. Whether you're already employing global talent or planning to expand, an Employer of Record (EOR) can streamline the process.
RemoFirst handles global payroll for international employees in 180+ countries, ensuring every payment is accurate and compliant. We ensure your payroll runs seamlessly and eliminate the stress of managing it on your own.
Book a demo today to see how RemoFirst can help your global business.
