What Is the True Cost of Payroll Errors?

According to PwC UK, the cost of payroll errors incurred by the average FTSE 100 company is between £10M and £30M per year. But it’s not just large enterprises that struggle with the costs of inaccurate payroll. Small and medium-sized businesses are also affected by the financial consequences of payroll mistakes.

With approximately 15 corrections per pay period and an average cost of fixing payroll errors of $291 (based on data from Ernst & Young), costs can quickly add up—especially since it’s not just about the direct cost of actively rectifying the errors that occurred.

The financial impact of payroll mishaps on a business goes far beyond additional overhead. Depending on the severity of the error, businesses face fines, penalties, litigation costs, and loss in employee trust leading to increased turnover and replacement costs.

What are the most common types of payroll errors? How do payroll errors affect business operations? What is the cost of payroll errors on compliance, employee morale, and staff retention? Read on as we explore the financial impact of payroll errors—and answer the key question: How much do payroll errors cost a business?

Payroll errors refer to any mistake made during the payroll process that affects an employee’s compensation or a business’s payroll compliance. They can occur at any stage of the payroll process—from entering employee hours worked to filing taxes. Typical payroll mistakes include:

• Miscalculations of wages: This includes incorrect hourly rate application, overtime miscalculations, or misapplied bonuses or commissions.

• Missed or late payments: Employees not receiving their pay on time due to processing issues or missed deadlines.

• Incorrect tax withholdings: Withholding too much or too little from employee paychecks for federal, state, or local taxes.

• Benefit miscalculations: Errors in calculating deductions for healthcare, retirement contributions, or other benefits.

• Employee misclassification: Misclassifying workers as independent contractors when they should be classified as employees.

• Payroll reporting errors: Inaccurate or incomplete reporting to tax authorities or labor agencies.

Why Do Payroll Errors Happen in Small Businesses?

There are various factors that contribute to low payroll accuracy in SMBs. They include:

• Relying on spreadsheets or manual time tracking,

• Limited staff resources in payroll and HR which leads to oversight, and

• Lack of regular payroll audits and compliance reviews.

Why Do Payroll Errors Happen in Large Enterprise Organizations?

The fact that enterprises typically have more personnel and a larger tool stack doesn’t automatically lead to higher payroll accuracy. Large companies may face different pain points than SMBs, but the pain points they have are just as likely to cause payroll mistakes. Common payroll issues in large-scale businesses include:

• Complex pay structures across departments or geographies,

• Scattered system landscapes with legacy software and integration issues between multiple payroll, time tracking, and HR systems,

• Higher payroll volumes which increase the probability of small errors going unnoticed until they snowball.

How Common Are Payroll Errors?

Payroll errors happen far more often than one might think. The following stats highlight the frequency of errors in payroll:

• Almost 90% of organizations in the UK and Ireland have made mistakes in the last 12 months that resulted in employees getting paid incorrectly or late (Source: MHR).

• 15 corrections are needed per pay period on average (Source: HR Dive).

• Organizations that process retroactive payroll report an average of 345 off-cycle payments due to errors each year (Source: Workday).

• Globally, businesses achieve only a 78% payroll accuracy rate (Source: ADP).

What are the most common types of payroll errors?

An Ernst & Young report from 2022 on the Cost and Risks due to Payroll Errors revealed the most common types of payroll errors:

• Time and attendance errors: These are the most common type of errors, occurring on average more than once per employee per year.

• Vacation/paid time off/sick time request errors: These occur at a rate of 721 errors per 1,000 employees annually.

• Benefits-related errors: These happen at a rate of 503 errors per 1,000 employees per year.

• Schedule earnings and deductions: Schedule earnings and deductions errors happen at a rate of 410 per 1,000 employees per year.

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Fixing payroll mistakes isn't just a hassle—it costs businesses real money. As stated in the introduction, each payroll error costs businesses an average of $291 to correct, which includes $281 in direct expenses like reprocessing and adjustments, and $10 in indirect labor costs—i.e., employee time spent resolving the issue. While that might not seem significant for a single incident, the costs can escalate quickly in organizations with several thousand employees.

On average, businesses operate at a payroll accuracy rate of just 78%, which means that 22% of payroll transactions potentially contain errors. When applying this to a business with 1,000 employees paid monthly, we’re looking at roughly:

• 12,000 payroll transactions per year (1,000 employees × 12 months),

• 2,640 potential errors annually (22% of 12,000), and

• An annual cost of $768,240 just to fix payroll issues (at $291 per correction).

Most businesses recognize the immediate, visible impact of payroll mistakes—such as having to reissue paychecks or adjust tax filings. But the real danger lies in the hidden costs which accumulate slowly in the background and have a much more profound impact on businesses over time.

Here is an overview of the four key hidden costs that every business should be aware of:

• Compliance penalties, fines, and litigation costs,

• Loss of employee trust and increased turnover,

• Reputational damage potentially leading to lost business opportunities, and

• Time lost on manual intervention to rectify errors.

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Payroll errors don’t just frustrate employees—they can expose your business to serious legal and compliance risks. Even unintentional mistakes like underpaying taxes, misclassifying employees, or missing benefit contributions can result in audits, penalties, and even litigation.

The above-mentioned study by Ernst & Young revealed that 14% of businesses faced litigation or compliance issues related to payroll errors in the previous 12 months. The report also detailed both direct and indirect compliance and litigation costs related to payroll errors, including:

• $3,200 in direct litigation costs,

• $5,200 in fines, and

• $4,600 in legal fees.

What’s more, the time investment is substantial: Companies spend an average of 29 hours resolving litigation and 91 hours handling compliance issues, totaling 120 hours per year that could otherwise be spent on productive business activities. At an average fully loaded HR/legal cost of $60 per hour, that’s an additional $7,200 annually in lost internal labor value.

In total, that adds up to $20,200 per year in legal, compliance, and internal time costs resulting from payroll errors.

Can payroll errors affect employee retention? The answer is a definite yes. When employees can’t rely on being paid accurately and on time, their trust in the organization begins to erode. Over time, these frustrations can compound—impacting morale, productivity, and ultimately, your ability to retain top talent.

A survey from The Workforce Institute at Kronos found that 49% of employees start looking for a new job after just two payroll mistakes. Unfortunately, these errors aren’t rare. Recent data shows that 39% of employees experienced payroll issues twice in a single year.

By combining these statistics, it’s estimated that around 19% of employees may consider leaving their jobs due to payroll errors annually. Even if only a fraction of them act on that intent, the cost is significant.

Let’s assume a conservative scenario based on broader workforce trends. In 2021, while 40% of employees considered quitting their jobs, only about 3% actually did—meaning roughly 7.5% of those who consider leaving follow through. Applying that ratio to payroll-related dissatisfaction, if 19% of employees consider quitting due to payroll errors, then approximately 1.4% of employees are likely to actually leave each year because of payroll issues.

Research from Gallup suggests that the cost of replacing an employee can reach up to one-half to two times his or her annual salary. For a company with 1,000 employees and an average annual salary of $66,622 (average salary in the U.S. according to 2024 data), the cost of replacing those who leave adds up quickly:

• 1.4% of 1,000 employees = 14 employees lost per year

• Cost range per employee = $33,311 to $133,244 (0.5x to 2x annual salary)

• Total turnover cost due to payroll errors = $466,354 to $1,865,416 annually

This doesn't even account for the indirect impacts—such as lost productivity, disrupted teams, and the time it takes to onboard and train replacements.

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Based on the numbers and stats shared above, let’s calculate the cost of payroll mistakes for an enterprise organization with a headcount of 2,000 employees.

Direct Cost of Fixing Errors

• 2,000 employees × 12 pay cycles = 24,000 payroll transactions/year

• 22% error rate = 5,280 errors/year

• Average cost per error = $291

• Annual correction cost = 5,280 × $291 = $1,537,680

Employee Turnover Costs

• 1.4% of employees may quit annually due to payroll issues

• For 2,000 employees = 28 resignations/year

• Average U.S. salary = $66,622/year

• Turnover cost per employee = 0.5 to 2x salary = $33,311 to $133,244 per employee

• Total turnover cost = 28 employees × $33,311 to $133,244 = $932,708 to $3,730,832 per year

The Bottom Line:

• Correction costs: $1,537,680

• Legal & compliance costs: $20,200

• Turnover costs: $932,708 – $3,730,832

• Total estimated annual cost: $2,490,588 – $5,288,712 per year

Payroll errors can result in substantial costs related to corrections, compliance issues, and increased employee turnover. With average payroll accuracy at just 78%, many organizations still rely on manual processes and outdated systems that make errors more likely and harder to manage.

The good news is that these issues are preventable. Modern payroll technologies—such as payroll automation, systems integration, and centralized platforms—offer practical ways to improve accuracy, reduce administrative effort, and stay compliant.

Lano supports payroll and compliance across 170+ countries, offering a single platform that consolidates global payroll, multi-currency payments, vendor management, and compliance. By integrating with leading HRIS and ERP tools and automating key workflows, Lano helps reduce payroll processing time by up to 35% while increasing accuracy and control. Book a demo with one of our payroll experts to learn more.

How much money do companies lose to payroll mistakes each year?

Payroll errors can cost large enterprises with around 2,000 employees between $2.5 million and $5.3 million annually. This total includes:

• About $1.5 million in direct correction costs

• Around $20,000 in legal and compliance expenses

• Between $930,000 and $3.7 million in turnover costs from employee resignations due to payroll issues

What’s the average cost to fix a payroll error?

Fixing a single payroll error costs an average of $291, including $281 in direct processing costs and $10 in internal labor time. These costs scale quickly for companies with high payroll volumes.

Can payroll errors cause legal issues for businesses?

Yes. 14% of companies report facing litigation or compliance issues from payroll errors, incurring average annual legal and compliance-related costs of $13,000, along with 120 hours of lost productivity.

How can payroll mistakes impact tax filings and compliance?

Errors in payroll can lead to incorrect tax withholdings and reporting, exposing businesses to penalties, audits, and fines. Resolving compliance issues often requires significant time and legal costs.

Do payroll mistakes hurt employee morale or trust?

Yes. Nearly half of employees (49%) consider leaving after just two payroll mistakes. Even small payroll issues can damage trust and contribute to increased turnover and reduced productivity.

What’s the ROI of investing in payroll automation tools?

Payroll automation can significantly reduce errors, saving businesses millions annually. For example, a company with 2,000 employees could avoid over $1.5 million in correction costs and between $930,000 and $3.7 million in turnover costs each year.

How do you audit a payroll system?

Payroll audits involve reviewing employee classifications, pay rates, tax withholdings, benefit deductions, and compliance records. Regular audits help detect and prevent costly payroll mistakes. A detailed step-by-step payroll audit checklist can help prevent oversight.

What are the best ways to prevent payroll errors in 2025?

To prevent payroll errors in 2025, businesses should:

• Automate payroll processes with reliable software,

• Integrate time tracking and HR systems,

• Conduct regular audits,

• Train payroll staff, and

• Standardize procedures across departments and locations.