Avoiding Common Mistakes During a Payroll Assessment or Audit

Payroll is often one of the largest expenses for a business, making it essential to do it correctly. However, there are many steps in the process and many opportunities for minor mistakes to grow over time. Understanding those mistakes will help prevent them from happening in the future and provide things to look out for when initiating payroll systems. A payroll audit may be done when a business needs to check how the payroll function is running and ensure everything is above board and up to date. While it’s beneficial to learn which basic mistakes to watch out for, there are some steps regarding the audit process that can improve your systems further. Don’t leave payroll up to chance when it greatly impacts the business and the employee. 

Common Payroll Mistakes

Payroll is often more complicated than people think, and that can contribute to simple mistakes piling up. Below are some of the most common payroll errors made, but there are plenty more to watch for when prepping for an audit or checking the system in general. Don’t forget, ignorance is not an excuse for when it comes to breaking payroll laws or not being compliant. Not having the proper payroll processcan have a serious impact, including hefty fines or even jail time.

1. Poor Record Keeping

Maintaining detailed records of all employees, their pay history, and additional information is essential for any business. Under the Fair Labor Standards Act (FLSA), employers must maintain pay records for at least three years. These records must include the number of hours worked, payment rates, and payroll dates. Additionally, some states have their own record-keeping regulations that could require employers to keep records for longer than three years. Failing to maintain proper records could result in significant complications in the future.

Learn how far back records need to go and develop a sound system for storing and sorting records. Most records for payroll and other procedures are online, and those must be stored securely so that personal information is not available to unauthorized individuals.

2. Misclassifying Employees

If you classify an employee as an independent contractor or refuse to pay overtime to non-exempt salaried staff, you could be in violation of the Fair Labor Standards Act (FLSA) and face substantial penalties. Reviewing the U.S. Department of Labor’s classification guidelines, IRS regulations, and relevant state laws is crucial to protecting your business. Take some time to familiarize yourself with these guidelines and rules.

3. Tax Troubles

If you’re not correctly reporting your employees’ taxable income and filing each year, you could have big problems later on. Fringe benefits such as stock options, achievement travel, and employee discounts are typically subject to federal income and employment tax withholding. Reporting these types of compensation to the IRS is crucial since failure to do so may result in significant penalties.

Payroll Audit or Assessment Process

If a payroll assessment or audit feels necessary or is in the works, it helps to know what to expect. Planning ahead and preparing for a payroll audit will help it move smoothly and provide the best outcomes for your company. 

A payroll audit involves analyzing a company’s procedures to ensure accuracy. The audit scrutinizes various aspects, such as active employees, pay rates, wages, and tax withholdings. Conducting a payroll audit at least once a year to ensure your processes are up-to-date and comply with legal requirements is advisable.

Payroll audits are often conducted internally by someone within the business. Conducting internal audits can help detect errors and prevent external audits in the future.

The general steps in a payroll audit include the following: 

1. Checking employees listed (roll call)
2. Verifying wages (including supplementary pay)
3. Confirm time entries
4. Check payment records
5. Confirm tax withholdings, remittances, and accurate reports
6. Confirm proper compliance

Depending on the business and the kinds of payment and employees, more steps may be needed. An audit is done to catch problems before they become larger, long-term issues for the company. However, there are a few things to watch out for from the start when considering an audit.

Payroll Audit Issues

1. Delay

If you suspect an audit or assessment of payroll could benefit the payroll department and catch possible errors, don’t put it off. It is generally recommended that a business conduct a yearly internal audit to confirm proper compliance and that payroll systems are working correctly.

2. Improper Internal Training

You may choose to perform regular internal audits to guarantee proper payroll functions, but deciding who to conduct audits and how they go about it can be challenging. If the staff member performing these audits doesn’t know what to look for or is the same individual who made an initial mistake, the systems are unlikely to be corrected. 

The staff member conducting internal audits should have a thorough list of what to look for and a solid understanding of how the payroll system works. 

3. Undocumented Details

A payroll audit can involve many detailed questions about how things are run, which employee is paid for what, and how all payments break down. But these can’t be answered without the proper records and documentation. Before an audit, go through and gather all necessary resources that may be requested. It’s difficult for someone to find something that needs fixing if they don’t have all the information upfront. 

A Step Ahead

Utilizing a payroll consultant can help you avoid common payroll mistakes and also catch the more subtle problems in your system. Audits or assessments can help immensely, but catching internal mistakes is challenging. Hiring a payroll consultant allows your company to start a new system on the right footing or confirm compliance with the system currently in place. 
Willory’s team of expert consultants thoroughly analyzes an organization’s human resources department and payroll to develop a customized and effective strategy that aligns with the business’s specific needs. They conduct a comprehensive assessment of the HR department, including evaluating payroll systems and HR compliance to achieve successful outcomes in executing the ideal strategy for your company. Learn more here about how Willory can help your business thrive.