What’s a payroll audit?

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A payroll audit is an analysis of a company’s payroll processes to ensure accuracy. Payroll audits examine things like the business’s active employees, pay rates, wages, and tax withholdings. You should conduct a payroll audit at least once per year to verify your process is up-to-date and legally compliant.

Generally, payroll audits are internal, meaning you or someone in your business conducts them. Performing internal audits can help you catch errors and prevent possible external audits later on.

After conducting the review, examine your payroll audit report. If necessary, make changes for future payroll processing. You may also need to retroactively make changes. For example, you might provide retroactive pay to an employee or remit more in taxes to the IRS.

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Why do you need to conduct a payroll audit?

Conducting an audit can be time consuming, but you should do so at least annually to uncover errors and reduce the following business risks.

 

Tax reporting and deposits

IRS and state departments of revenue require businesses to file accurate payroll tax returns and submit taxes withheld from pay. You also need to meet filing and tax deposit requirements for Social Security, Medicare, and unemployment compensation programs. If your payroll process works effectively, you can file returns, make deposits on time, and avoid fees and penalties.

 

Uncovering a fictitious payee

An audit may find a person on your payroll who is no longer employed with your company, and you need to correct the error by removing them.

A payroll audit can also uncover a fictitious payee, or ghost employee, who does not exist. This type of fraud takes place when an employee adds a fake worker to the payroll records and collects the payments for personal use.

 

Complying with employment laws and other regulations

Audit your payroll to confirm you’re complying with these laws and regulation:

• Correct minimum wage and overtime pay according to the Fair Labour Standards Act

• Keep payroll records on file for a minimum of three years

• For union workers, comply with the pay and overtime rates required in the collective bargaining agreement with the union.

• Follow your state’s employment laws

 

Providing accurate data to workers

Your workers need to be paid accurately, and they need reliable payroll information to file a personal tax return. You need to confirm that the pay rate, vacation days, and paid time off benefits are accurate.

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Payroll audit procedures

Use the following steps to get started on your payroll audit process.

1. Look at the employees listed on your payroll

Review your employees listed on your payroll. Verify that all of these employees worked for you during the time period. If more workers are listed on your payroll than you had working for you, you may have a problem.

Some employees commit payroll fraud by adding fake employees to payroll. Or, you may have forgotten to remove a terminated employee from your payroll.

Make sure that the list of employees on your payroll matches your employment records. Remove any employees who no longer work for you. You may need to dig deeper to find out why those employees are on your payroll.

2. Analyse your numbers

When conducting a payroll audit, you can’t avoid analyzing numbers. Running payroll is mostly numbers—pay rate, hours worked, total pay for the period, and withheld taxes are some essential payroll numbers.

Examine each employee’s pay rate to ensure you paid the worker the correct amount. Make sure the pay rate is up-to-date and matches the employee’s record. If you gave the employee a raise or salary reduction, verify that you changed the pay rate on the applicable date.

Look into the hours the employee worked. Did they really work those hours during the pay period? Does your payroll system match what’s recorded in your time and attendance software? Did you provide overtime pay to non-exempt employees who worked over 40 hours in a workweek?

3. Verify time is correctly labelled

Most employers give employees time off from work, with many providing paid time off (PTO). Do you provide time off? If so, make sure you or your employees properly labelled time when running payroll. That way, you can identify when an employee worked and when they didn’t.

If you provide a set number of paid time off, subtract it from the employee’s available time off. Be sure to label time off as vacation, personal, sick, bereavement leave, or whatever labels you use.

4. Reconcile your payroll

Next, look at your payroll. Compare your findings to other records to verify your totals match. If there is a discrepancy, closely examine your records to find out the problem.

Compare your payroll records to your business’s general ledger. The payroll expenses in your general ledger should match your payroll audit findings.

Next, you need to reconcile your payroll records with your bank statements. Compare the amounts listed in your payroll records to what was withdrawn from your account. Consider having a separate payroll account to make bank reconciliation easier.

5. Confirm tax withholdings, remittance, and reports are accurate

Another critical payroll audit procedures step is verifying the accuracy of your employment taxes.

Make sure you withheld the correct amount of taxes from each employee’s wages. You must withhold federal income, Social Security, and Medicare taxes. You may also need to withhold state and local income tax. And, verify that remitted tax amounts are correct.

 

DISCLAIMER- These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the author and are not individual legal advice.

It is understood that each case is fact specific and that the appropriate solution in any case will vary. Finally, the owner will not be accountable for any loses injuries or damages from the exposures or usage of this information

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