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5 Ways to Avoid Costly Payroll Conversions

October 9th, 2023 | 6 min. read

By Kristi Feist

Switching or upgrading payroll systems can be a nerve-wracking experience for any business. The fear of costly mistakes, compliance issues, and operational disruptions can make this transition seem like a high-stakes gamble.

However, you can navigate this complex process smoothly with the right strategies and meticulous planning. Payday HCM has been helping clients with these issues for decades.

This article explores five ways to avoid expensive payroll conversions. This will help you switch without spending too much or losing sleep. Here is what you’ll learn:

  • Cost Effectively Planning and Budgeting with Your Payroll
  • Seamless Conversions with Data Accuracy
  • Payroll-Related Compliance and Legal Considerations
  • Employee Training and Onboarding: The Human Element of Payroll Conversions
  • Post-Conversion Audits: Your Safety Net Against Errors

#1: Cost Effectively Planning and Budgeting with Your Payroll

The Importance of Planning

A well-laid plan serves as your blueprint for a successful payroll conversion. It's your first line of defense against costly errors and budget overruns. Map out each step of the process. From initial assessments to data migration and employee training — creating a roadmap guides your entire team. This roadmap helps allocate resources effectively and sets clear timelines, ensuring everyone is on the same page.

On the flip side, poor planning can be disastrous. You're navigating through a maze without a clear plan. This lack of direction can lead to duplicated efforts, missed deadlines, and compliance issues. 

For instance, if you have not meticulously planned the data migration phase, you might have inaccurate employee data in the new system. This will lead to payroll errors and potential legal complications. Investing time in planning can save you from several problems down the line.


The Full Spectrum of Costs

While the upfront cost of a new payroll system often grabs the spotlight, it's just the tip of the iceberg. Companies underestimate the cost of implementing a new software system by 30-40 percent

Hidden costs such as training, data transfer, and potential overtime for your HR team can significantly inflate the overall expenditure. A detailed budget accounting for these often-overlooked elements is essential for avoiding financial headaches.

Even with a well-planned budget, unexpected expenses can arise. You might discover midway through the conversion your new system requires additional customization or you’ll need to hire external consultants for data migration. 

A good rule of thumb is to allocate 10-20 percent of the project budget for contingencies. This financial cushion can be a lifesaver, preventing you from having to dip into other operational funds or halt the project midway due to a lack of resources.

#2: Seamless Conversions with Data Accuracy

The High Cost of Inaccurate Data

Inaccurate employee data is a common culprit behind costly payroll conversions. Poor-quality data can cost businesses up to 15 percent to 25 percent of their operating budget. This could mean incorrect tax withholdings, overpayments, or underpayments. 

These can lead to hefty fines and legal complications. Ensuring that all information, from tax codes to pay rates and benefits, is accurate before making the switch is not just advisable — it's imperative for a smooth transition.

The impact of inaccurate data can have a domino effect on various aspects of your business. Incorrect tax codes can lead to compliance issues, triggering audits and potential penalties. The average sentence for late or inaccurate payroll tax filings can be nearly $1000. Errors in employee data can also affect morale and trust, as employees who experience issues with their pay are less likely to be engaged and productive.

The Role of Data Audits & Leveraging Technology for Data Accuracy

Before initiating the payroll conversion, conducting a thorough data audit is advisable. This involves cross-referencing the data with multiple sources to identify inconsistencies or errors. Organizations that regularly audit their data can reduce operational costs by as much as 10 percent. This proactive approach can help you catch mistakes before they become costly problems, ensuring a smoother and more efficient conversion process.

Modern payroll systems often come equipped with advanced data validation features. These tools can automatically flag inconsistencies in employee data, from mismatched social security numbers to outdated tax codes

Companies that use automated data validation tools reduce errors by up to 60 percent. Leveraging these technological advancements can significantly enhance the accuracy of your employee data, making the payroll conversion process more streamlined and cost-effective.

#3: Payroll-Related Compliance and Legal Considerations

Compliance and the Cost of Non-Compliance

Compliance is a consistent responsibility. Nearly 44 percent of small businesses spend at least 40 hours per year dealing with federal regulations. This doesn't even account for state and local laws.

Your new payroll system should be adaptable to ever-changing tax laws and labor regulations. Failure to update your system in line with these changes can result in penalties amounting to billions of dollars in payroll tax violations alone.

The financial repercussions of failing to comply with laws and regulations can be staggering. The average cost of non-compliance for businesses is around $14.8 million, a 45 percent increase from 2011. This includes fines, settlements, and the cost of business disruption. Therefore, your new payroll system must be flexible to adapt to anticipated and unexpected legal changes.


Consulting Experts or Using Compliance Software

Regarding legal matters, it's always better to consult experts. Businesses that sought expert compliance advice are 31 percent less likely to encounter legal issues than those that didn't

Legal and accounting professionals can provide invaluable insights into compliance requirements, helping you sidestep potential landmines. Their expertise can be particularly beneficial during the transition period, where the risk of overlooking a compliance detail is high.

Many modern payroll systems have built-in compliance modules automatically update tax tables and other regulatory information. Companies that utilized compliance software reduced their risk of legal issues by up to 50 percent. These systems can also generate real-time reports to help you monitor compliance levels, making it easier to address any gaps proactively.

#4: Employee Training and Onboarding: The Human Element          of Payroll Conversions

Employee Training and its ROI

A new payroll system can be confusing for employees who are accustomed to the old one. Companies investing in comprehensive training programs have 218 percent higher income per employee than companies without formalized training

Investing in a robust training program can make the transition smoother and significantly reduce the likelihood of costly errors, such as incorrect data entry, that could lead to compliance issues.

The return on investment (ROI) for practical employee training is substantial. Companies offering comprehensive training programs enjoy a 24 percent higher profit margin than those who spend less on training. By investing in training, you're facilitating a smoother payroll conversion and setting the stage for more efficient operations in the long run.

Cost-Effective Onboarding Process

A structured onboarding process with guides and video tutorials can be a game-changer. Organizations with a vital onboarding process improve new hire retention by 82 percent and productivity by over 70 percent. 

The easier it is for employees to adapt to the new system, the fewer mistakes they will likely make. This saves time and reduces the risk of costly errors resulting from misunderstandings or lack of knowledge about the new system.

Efficient onboarding can also have a direct impact on your bottom line. The average cost to hire an employee is $4,129, and it takes about 42 days to fill a position. A streamlined onboarding process can reduce the time employees need to become proficient in the new system, thereby reducing the costs associated with productivity loss during the transition period.

#5: Post-Conversion Audits: Your Safety Net Against Errors

Unpredictable Financial Impact of Unaudited Errors

Even the best-laid plans can go awry, especially when dealing with complex projects like payroll conversions. Nearly 14 percent of IT projects fail, and one of the leading causes is poor performance monitoring. Conducting a post-conversion audit serves as a final checkpoint to catch any discrepancies or errors before they escalate into costly problems.

The financial repercussions of undetected errors can be significant. Error rates in manual payroll systems can range from 1 percent to 8 percent of total payroll. For a company with a monthly payroll of $500,000, this could mean errors costing up to $40,000. A thorough post-conversion audit can help you identify and rectify such errors, saving you from potential financial losses.


What to Look for in Audits and Long-term Benefits of Regular Audits

It's crucial to scrutinize various aspects like pay rates, benefits, and tax withholding during the audits. The penalty for late or incorrect payroll tax filings can be around $ 1,0000 per incident. Ensuring the new system fully complies with legal requirements can save you from such corrections. Additionally, check for discrepancies in employee data, time tracking, and benefits allocation to ensure the system is compliant and accurate.

Post-conversion audits need to be a regular strategy. Businesses that conduct regular audits have a 22 percent lower fraud rate and a 60 percent faster detection rate for financial discrepancies. Regular audits can help you maintain the integrity of your payroll system, ensuring that it remains accurate, compliant, and efficient in the long run.

The Road to Cost-Effective Payroll Conversions

Transitioning to a new payroll system is a complicated but necessary endeavor for businesses aiming for efficiency and compliance. Each step is crucial for a successful conversion, from meticulous planning and budgeting to ensuring data accuracy and legal compliance. 

As we've highlighted, the stakes are high, with potential financial losses and legal penalties that can be avoided through careful preparation and execution. Investing in comprehensive employee training and conducting thorough post-conversion audits as safeguards against costly errors is essential. 

Plan for regular audits and employee training sessions as part of your ongoing strategy to maintain a robust and compliant payroll system. 

By taking a holistic approach that covers all these bases, you're not just ensuring a smooth transition but also laying the foundation for long-term operational excellence. Contact our team for a personalized consultation on creating streamlined conversion for your company.

Kristi Feist

As a seasoned veteran in the industry and with Payday HCM, Kristi maintains a 1000+ client portfolio with a 98% retention rate. As Vice President of the DSO Division, Kristi works with hundreds of DSO-like companies to adopt best practices around the use of payroll technology, implementing processes and empowering employees of DSOs to use the technology.