The Real Cost of Payroll Errors in 2026 (and How to Prevent Them Before They Happen)

Given payroll is likely your organization’s largest expense, payroll errors have the potential to skew your labor spending.

At the same time, consistent payroll accuracy and compliance represent two of the most important promises you make to your workforce. Because if you can’t prevent payroll mistakes and ensure your business runs legitimately, what reason do employees have to stay?

Luckily, in 2026, this high-value process doesn’t require an equally high amount of hard-to-manage risk and labor to get right. To better understand why your organization needs the right software to automate payroll and help ensure its accuracy, let’s explore the:

• cost of payroll errors
• most common payroll mistakes and how they form
• root cause of payroll inaccuracies
• best way to optimize payroll at its source

Payroll errors are more common — and more expensive — than ever

Before we dive too deep into how costly payroll errors can be, we should look back at research that revealed how common these issues really are. In December 2022, EY found organizations that relied on a traditional payroll process — one that isn’t automated to let employees access, review, troubleshoot, verify and approve their pay before submission — could expect a nearly 20% error rate. EY also revealed that, on average, fixing just one payroll error costs a business $291.

Keep in mind, EY’s study can’t account for inflation and other shifting economic conditions that have occurred since 2022. While payroll errors rising in cost may not be an absolute certainty for every organization, the complexity of payroll’s components and requirements has likely increased. This could include:

• updated and emerging local, state and federal laws
• multistate, hybrid and remote working environments
• an uptick in available benefits (and deductions) for employees
• increased head count from continual growth

Yet even if the average cost of a payroll error seems low, keep in mind that figure only refers to a single mistake. It also assumes an average, which could be higher depending on the issues an organization faces. For example, EY found that addressing unentered sick time could cost employers $705 per incident.

Plus, the cost of one mistake doesn’t consider the total amount an organization stands to lose. In 2022, EY estimated that, for a 1,000-employee company, correcting payroll errors could cost up to $922,131 annually. How much could your business stand to lose in 2026?

When it comes to payroll, inaccuracy rarely happens in isolation. These issues tend to compound, resulting in repeated, costly fixes at a minimum and potentially a systemic problem that harms employees and threatens an organization’s compliance.

7 of the most common payroll errors today

While certain issues may be unique to your organization, you may still face many of the most common payroll errors. Keep the following in mind as you begin to trace the impact of payroll inaccuracies on your workplace.

1. Incorrect hours

Missing punches or outright wrong time sheets continue to complicate and disrupt payroll. When this data can’t seamlessly flow to payroll in real time, it requires HR to manually reenter it. This issue could worsen if employees don’t have intuitive tech to log their time and submit time-off requests, instead having to rely on:

• spreadsheets
• paper forms
• emails with their manager and/or HR
• an honor system

Without easy-to-use, automated software, organizations will likely continue to face time and attendance errors that cascade into payroll.

2. Incorrect overtime calculations

Missing hours create their own issues, true, but incorrectly calculating those hours can easily yield retroactive fixes and employee frustration — especially when it comes to overtime. On one hand, missing overtime pay makes it difficult for employees to plan, as they likely have rough expectations of how overtime hours will be reflected in their upcoming paycheck. And given overtime is legally required for nonexempt workers, failing to accurately pay it could result in fines and other compliance penalties.

At the same time, paying for overtime that wasn’t worked could lead your organization to overspend on labor. In turn, this could take away resources from and delay the progress of programs and initiatives that help work toward long-term business goals.

3. Incorrect deductions

Like how a lack of automation between time tracking and payroll processing can produce inaccurate hours, a lack of seamless communication between benefits enrollment and payroll can lead to incorrect deductions. Incorrectly charging an employee for a selection they didn’t make is painful enough by itself.

However, if an organization fails to apply a payroll deduction for something like health care, it probably means their health care provider isn’t receiving payment, either. By extension, this mistake could mean an employee isn’t receiving insurance, and they may not be aware of it until they discover they need the coverage — which is almost certainly too late.

4. Wrong tax withholding

Every payroll cycle brings the potential for noncompliance, especially if your organization doesn’t have a consistent tool for automating tax withholdings. Payroll taxes for both employers and their employees demand accuracy, requiring businesses to confidently manage:

• federal income taxes
• the Federal Unemployment Tax Act (FUTA)
• Social Security and Medicare taxes
• state withholding taxes
• local taxes

It’s not enough to simply know the taxes that apply to your organization. You also have to ensure you accurately calculate and process those taxes in payroll. Failing to do so could leave your organization susceptible to high fines, untimely audits and other severe penalties.

5. Incorrect employee information

In 2026, direct deposit isn’t just a nice perk, but an expectation. And without 100% accurate direct deposit info, the convenience could easily turn into a confusing, frustrating and complicated error to fix.

Of course, incorrect employee info isn’t limited to direct deposit. An incorrect address means an employee may not receive important notices from insurance providers. Or the wrong phone number could mean they don’t get notifications related to your organization’s payroll policies. Any of these examples and more could spur payroll errors that fracture the trust an employee has in their company.

6. Manual entry mistakes

While we’ve examined some issues that could result from manual entry, a lack of automation in your organization could also complicate how you:

• accurately pay a new hire
• submit raises and other compensation changes
• implement a new benefit deduction when an employee has a qualifying event
• ensure an accurate final payout for an employee who recently left your organization

Nearly every piece of workforce management feeds into payroll. The more manual data entry you have across your HR processes, the higher the chance you could face payroll errors during every pay cycle.

7. Missed or late payments

While possibly not the most common payroll error, missed or late payments can potentially be the most harmful. If inaccuracy in your process results in an employee not being paid on time, frustration, noncompliance and even turnover could quickly follow. And if your organization routinely misses required tax or other payments, it could compound your overall compliance spending.

The total cost of payroll errors: a direct and hidden cost breakdown

While the cost of payroll errors isn’t always obvious or consistent, all of them can take a toll on your organization. Consider the following ways unaddressed payroll mistakes could chip away at an employer’s bottom line.

Direct costs

The more tangible and easy-to-see costs reflect the immediate consequences of payroll mistakes. This can include:

• overpayments
• underpayments
• compliance penalties and litigation
• voids, wire transfers and rushed paper checks

These vary based on the nature of the payroll error itself, but missed actions have a more consistent average. According to EY’s December 2022 study, for example, failing to enter a new hire into payroll costs an average of $635 per employee. As for incorrectly completing Form W-4s, another extremely common process? EY found that an error could cost an organization $539 on average. While the exact tab your organization could accumulate may differ, every payroll mistake carries a price.

Employee trust and satisfaction impact

It can’t be overstated: Employees work to get paid, period. So if an organization can’t pay its workforce correctly, it’s unlikely it can maintain engagement, investment or even retention.

While it may be a bit harder to estimate the cost of disengagement and broken trust, outright losing employees to payroll errors and backfilling them is easier to approximate. According to the Society for Human Resource Management (SHRM), the average cost to hire a nonexecutive employee is $5,475, whereas executives can cost $35,879 per hire. Considering SHRM’s research, how much could your organization stand to lose if payroll errors forced you to replace frustrated former employees?

Time spent on corrections

It’s not so much that payroll errors themselves are costly, but the correction required to fix them. This is determined by the amount of time your HR or payroll specialist must invest in correcting the mistake, which quickly adds up without automated, single-database HR software.

EY’s December 2022 study revealed a full-time payroll employee loses an average of 29 weeks per year to fixing mistakes. Depending on the salary of every employee who manages payroll, this sink could amplify the total cost of inaccuracy in your organization.

Compliance and audit exposure

Risk can’t always be tied to a specific amount, but when it comes to payroll compliance, it’s safe to assume that potential cost is high. In fact, EY’s December 2022 research found nearly 1 in 6 businesses experienced legal, compliance or regulatory issues due to payroll errors in the last year.

How did this impact their bottom line? EY discovered businesses could pay up to $250,000 a year in:

• legal costs
• settlements
• regulatory fines

True, these kinds of mistakes may not necessarily result in a penalty if an organization corrects them in time. But give it enough time, and that risk could eventually produce a costly consequence.

Labor cost forecasting inaccuracy

For fast-moving and competitive organizations, optimizing labor costs is the key to successful workforce management. So if an employer is constantly wrestling with payroll errors and their associated costs, how could it consistently and reliably project what it will need to reach a long-term goal?

In this way, payroll errors cost not only resources but also opportunities. For the companies that faced legal issues, EY found 44% of them were forced to cut staff. If your organization were forced to cut from a department or delay progress due to unchecked labor costs, how much would it set you back?

Why payroll errors actually happen: Root causes most leaders overlook

Payroll errors don’t have to be business as usual. Preventing their impact, however, takes understanding how they form. To help identify the source of payroll mistakes in your organization, consider the following common root causes.

Outdated and inaccurate data

It might seem simple, but something as small as a single incorrectly entered digit has the potential to completely throw off your payroll accuracy. Think of it this way:

1. an employee accurately reports their hours worked
2. a lack of automated tech requires an admin to rekey that data
3. they enter it into their payroll tool incorrectly
4. the error isn’t obvious given how small it is
5. the affected employee receives an inaccurate check

Any HR tech that requires manual entry, reentry or transfer of data creates an opportunity for errors. And even if a provider appears or claims to be “all in one,” it could still rely on multiple databases on the back end that ultimately compromise your organization’s payroll accuracy.

Manual timekeeping or approvals

In the previous example, we assumed an employee would accurately report their hours. With self-service software that makes it easy for them to punch in and request edits as needed, timecard accuracy can be consistent.

Unfortunately, when employees have to rely on paper forms, emails, texts or quick conversations to convey hours to their leader, it severely increases the likelihood of payroll errors. Humans make mistakes, and creating more opportunities for those errors to occur can spell disaster for payroll.

Plus, it’s not always about timekeeping or even an employee’s ability to accurately report their hours. Take expense reimbursement, for example. If an employee submits their requested expenses in a timely fashion, there isn’t any guarantee their manager will remember to approve or deny the request. Whether the request is approved is beside the point; the longer an employee has to wait, the more damage an unapproved request potentially causes to payroll.

Disconnected systems for time and payroll

Separate databases and HR tech providers drastically increase the chance for manual work and the payroll errors that result. Unfortunately, most organizations have not successfully addressed this issue. According to Forrester Consulting, companies reported using an average of 6.17 HCM providers, and 71% of respondents said they’re unable to transfer or share data across the databases created by their disparate tech.*

Think of it this way:

1. HR pulls data from a separate time-tracking tool.
2. HR manually inputs that data into a separate payroll software.
3. After a time-consuming payroll process, an organization still has no guarantee of accuracy.

With this multisystem approach, businesses don’t just create unnecessary work for HR — they create an unnecessary risk for payroll accuracy, too.

Lack of data validation

If dumping manual work on HR and payroll staff wasn’t enough, a traditional payroll process also limits the opportunities to validate that data. And no, it’s not just about HR triple-checking its work. It’s about ensuring that the members of the group with the most at stake when it comes to payroll accuracy — employees — have an opportunity to verify it for themselves. Ideally, before submission.

With payroll, no amount of assurance is too much, especially when inaccuracy could result in turnover and noncompliance. Since most organizations don’t have a method for involving employees in the payroll process, it also means they sacrifice the possibility of reduced liability.

Reactive, not real-time, payroll processes

To better understand why organizations need a proactive payroll process, consider how it typically unfolds when an employee finds an issue with their pay:

1. HR accidentally runs payroll with an error.
2. Employees still get paid.
3. After realizing their check is wrong, the affected employee contacts HR.
4. HR then has to retroactively fix the mistake, costing the company resources and the affected employee their patience.

Even with the supposedly best software, HR could still make mistakes. And that’s OK, provided your tech gives employees the opportunity to find those errors and guides employees to fix them before submission. Without this capability, every error will require a reactive and ultimately costly fix.

How to prevent payroll errors at the source

It’s possible to prevent payroll errors, but not with tech that can’t ensure seamless communication between all your organization’s HR tools. Consider how the right tech uses automation within a single database to help ensure constant payroll accuracy.

Centralized data in a single system

To stop the needless, manual transfer of data between tools, the right payroll software will house all its tech within a truly single database. This means all data that impacts payroll seamlessly flows into the process, including:

• hours worked
• taxes
• benefits
• approved expenses
• time off and other leave

With single-database software, at no point does HR need to manually enter data into payroll. By extension, HR doesn’t need to invest extra time verifying if that data is accurate, since the truly single database helps ensure it.

Real-time verification before payroll runs

Ideally, the right payroll software will self-start each cycle and automatically guide employees to verify the accuracy of their paychecks before submission. This approach allows them to address and resolve errors before HR has to retroactively correct them after the employee is incorrectly paid.

This level of involvement with payroll doesn’t mean they can adjust their pay to whatever they want. Remember, this is a guided experience, so it limits your people to only verifying and confirming accuracy. Any change to their pay would still have to be completed by one of your authorized administrators.

Employee-first updates

The best payroll software won’t just prevent payroll errors, but also empower employees with access to their data whenever they need it. This should include a push notification for them to verify payroll accuracy, true, but it should also allow them to easily find other payroll data, such as:

• past pay stubs
• changes to their pay
• approved expenses and time off

For the truly best self-service experience, they should have this level of access without the need for extensive navigation or software training. Consider single-database software with a command-driven AI engine that allows employees to easily access accurate payroll data whenever they need — right at their fingertips or even with a simple voice prompt.

Automated time and labor flow

At a bare minimum, the right HR software will automate the flow of time and labor data into payroll. While this is undeniably important to establish a base level of payroll accuracy, keep in mind the process considers more than just time-tracking data.

Ideally, your tech should automate the flow of data from time-off requests, taxes, benefits, expenses and more into payroll. Anything less could detrimentally minimize the level of payroll accuracy your organization could achieve.

Built-in exception notifications

No process is truly flawless. Even so, payroll perfection can be possible if you use single-database software that provides an insightful dashboard complete with clear action items and priority issues.

While the right tech will allow HR to monitor — not meticulously manage — payroll, it should also provide clear insight into potential problems. That way, it can proactively address these issues before they ramp up unnecessary costs created by retroactive payroll fixes.

Built-in compliance and tax updates

Your organization’s ability to successfully navigate evolving compliance requirements is vital to its long-term health. As such, consider software that automatically updates based on new taxes and other regulatory requirements.

Having payroll software that operates within a truly single database is key. Even if you have separate tax management or time-tracking tools that account for compliance updates, the inability for them to seamlessly communicate with your payroll software could mean you still wind up with compliance-breaking inaccuracy, since it leaves no guarantee those changes will be reflected in payroll.

What best-in-class payroll systems look like in 2026

Ready to find the ideal payroll software for your organization? Consider the following best payroll software features as you compare your options:

• Single-database architecture: To ensure the highest amount of payroll accuracy possible, ensure the vendor you consider built its software entirely in-house within a truly single database.
• Real-time calculations: Your ideal payroll software will automatically adjust to updates and changes in real time, not just whenever HR formally initiates a new pay cycle. This will help ensure no modification falls through the cracks.
• Accurate labor rules: Software that truly scales with your organization’s needs will also scale with your compliance requirements. Your payroll provider should have a clear and reliable method for accounting for all the labor laws impacting your employees’ compensation.
• Self-starting every pay period: The best option will automate payroll by self-starting each cycle, pulling live employee data that affects their pay. It should also automatically notify managers and employees of any pending payroll tasks.
• An intuitive payroll dashboard: So HR can move from managing to monitoring payroll, ensure your provider includes a dashboard that empowers HR with real-time updates on expenses, punch-change requests, benefits, employee check approvals and more.
• Mobile employee self-service: The best payroll provider will equip employees with a fully mobile experience that provides them with the same ease of use and convenience they expect from the most accessible apps.
• Automated audit trails: To help ensure compliance, verify that any potential provider makes it easy to conduct self-audits and automate payroll compliance reports, including in government-required formats.

Preventing payroll errors starts long before payday

Remember, if your payroll software doesn’t operate within a truly single database that ensures seamless communication between every process that feeds into payroll, you’ll likely still wrestle with errors.

To prevent payroll mistakes and their costly consequences, look for single-database tech that self-starts and builds itself with real-time data. Your software should also automatically flag potential issues and guide employees to fix them before payroll runs — and before errors require a costly, retroactive fix.

Explore how Paycom’s truly single payroll software automates your most complex payroll tasks and helps ensure accuracy in one database.

*Single-Database HCM Solutions Drive Cross-Business Success, a commissioned study conducted by Forrester Consulting on behalf of Paycom, May 2025.