BookkeepingPayroll Audit: Objectives, Process & Checklist

Payroll Audit: Objectives, Process & Checklist

payroll audit checklist

When reporting your payroll, be sure to include any overtime payments employees receive. This will ensure your payroll record is as accurate as possible.

Proper Pre-Payment Practices: Validating your Payroll – ADP

Proper Pre-Payment Practices: Validating your Payroll.

Posted: Tue, 06 Sep 2022 14:28:11 GMT [source]

If you’re unsure how to reduce payroll costs, then don’t miss out on these cost-saving scenariors. Technology can eliminate many of your manual payroll tasks and improve your efficiency. Free research articles improve your sales, marketing, and service departments for free. Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you. You can use our Payroll Audit Checklist to come up with a plan for what you will be testing, when it should happen, and in what order.

What are internal controls for payroll?

It’s important to review the taxes you’ve paid on behalf of your business in addition to the taxes you’ve withheld from your employees’ paychecks to remit to the IRS. If you have both a timekeeping and payroll audit checklist payroll system, you can compare data for a specific time frame . You’ll need to check that the pay periods line up and that data from one system matches what the employees got paid in that timeframe.

payroll audit checklist

These numbers can change, especially if people move or the laws change. Remember, an employee who is classified as working the office may have completely different tax withholdings if they become taxed as if they are working from home. Think signing bonuses, relocation pay, back pay, and previous corrections. If you process reimbursements with payroll, double-check that this is accurate as well. It may require liaising with Finance or whoever handles reimbursements. If an employee receives a lot of reimbursements but doesn’t have a role that involves a lot of travel, this may be a sign of fraud.

Look at the employees listed on your payroll

Whether this is compensation, one-time payroll values, or employment information, the changes should be investigated. The next step is to identify the problem and resolve it to avoid the issue recurrence. Once you have resolved the issue, you should start the audit process all over again. However, if you notice any errors that have not been corrected, you should contact your accountant. Aside from reviewing what’s in your GL, you should take a look at the specific bank accounts you have set up to manage payroll and payroll tax payments.

Your small business does not have a legal obligation to audit your payroll records. In addition to verifying hours worked and pay rates, make sure that you have accurately distinguished between hourly and salaried employees. You must also ensure the correct classification of exempt and nonexempt employees under the provisions of the Fair Labor Standards Act. Employees who are nonexempt must receive overtime pay for every hour they work over 40 hours a week.

How to Process Contractor Payroll in 6 Steps

Regularly checking for payroll errors reduces the likelihood of run-ins with the IRS, too. Noticing employment tax underpayments early can save you money and hassle. You’re more likely to find payroll errors than flat-out fraud during a payroll audit. And for every mistake you catch, that’s another one prevented for the future. One test the audit team can perform is to sample time sheets and verify that the time sheet was recorded in the payroll report.

  • Make sure you check your state’s laws to see if you need to report independent contractors.
  • Hours worked must be documented, either on paper or electronically, in order for employees to be paid properly.
  • Document all of your payroll audit processes in a procedures manual so your team knows how each task is performed and who is responsible.
  • However, if you notice any errors that have not been corrected, you should contact your accountant.
  • Have an established policy on employee expenses and reimbursements.
  • Create a formal payroll audit report to get the information in the same format each time.

If funds are being transferred too early, you may experience cash flow shortages that could impact inventory or supply purchases. If they’re being remitted too late, you could face a labor law violation. Certain states have minimum pay frequency laws governing how your pay periods should flow.

Confirm accounting records

Eventually, you may have no choice but to audit your payroll records when faced with an IRS audit or a U.S. or state Labor Department claim. Make sure the numbers on your payroll reports match the numbers on your bank statements. It’s also a good idea to look out for any uncashed checks and seek to understand why they are uncashed. While you’re at it, make sure there have been no modifications to issued and cashed checks. Payroll audits can be a lengthy ask for your team but they are incredibly crucial to making sure your payroll is running as smoothly as possible for your global business. Here are nine important things to consider to ensure your payroll audit is as thorough and error-free as possible.

  • You can do this by comparing your tax remittance reports alongside your payroll reports.
  • Make sure that none of the checks appear to be modified, and that the amounts on the cancelled checks match the amounts on the transaction reports from the payroll ledger.
  • These vary by state, so make sure you’re compliant with regulations where you operate.
  • Payroll is the leading expense for most small businesses, and it’s also one of the most complex.
  • The next step is to determine which employees will be involved in the payroll audit.
  • Get the consent of your employees and job applicants to run background checks, otherwise you violate the Fair Credit Reporting Act .

Check that everyone on the payroll is a bona fide employee and is taking home the correct pay rate. Sexual harassment laws are one of the fastest-changing employment laws of these times for companies.

Compare your payroll records to your business’s general ledger. The payroll expenses in your general ledger should match your payroll audit findings. Most employers give employees time off from work, with many providing paid time off . If so, make sure you or your employees properly labeled time when running payroll. That way, you can identify when an employee worked and when they didn’t. You should also look at a few pay stubs to check that benefits premiums that your employees are responsible for paying are coming out of their paychecks. Here are some of the employee deductions you should verify.

payroll audit checklist

For example, every time you start paying an employee who lives in a new state, you might need to get a unique state-specific tax identification number. The onus turns to you to make payroll tax payments in the interim.

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