Payroll Audits: Top Problems Found and How to Avoid Them

Written by:
Jeffrey Garrand
VP of Payroll and HRIS Technology Services

A payroll audit can help eliminate inefficiencies in your systems, ensure your organization is fully optimized, and prevent penalties from tax violations. If you’re not performing payroll audits, you could run into a number of easily preventable problems.

What are some of the most common problems found during payroll audits?

This article will discuss the top problems found in these audits as well as some best practices to avoid these issues in the first place.

Top Problems Found During a Payroll Audit

The main warning sign of problems that I see most often is excessive manual effort in any part of the process. Most current technology solutions are set up to avoid an extended amount of time to complete tasks. If you feel like you’re spending too much time on a particular task, there is most likely an efficiency problem. And when it comes to tax compliance problems, those warning signs are first noticed by government agencies, so it’s best to get ahead of that.

There are three types of payroll audits, and they can each have their own specific issues. Let’s look at the top problems found during each of them.

Payroll Procedural Audits

This audit ensures that the correct people on your team are doing the correct jobs. Your company may have outdated processes in place because of the long-term tenure of the team (i.e., they have always done it a certain way).

Procedural audits for payroll confirm if the proper separation of duties is in place and if there is an adequate system of checks and balances. For example, is a payroll employee entering new hire information and submitting payroll when this should be divided between two separate employees? No one person should have sole responsibility for payroll, or for ensuring that everything is error-free. That gives a person too much control. Having multiple staff involved reduces the chance of fraud, and also gives the company alternatives in case an employee becomes ill, resigns, or is terminated.

Poor communication between departments can cause discrepancies as well. HR and finance need to be on the same page so they understand each other’s needs and can accurately code employees in the system.

Payroll Technology System Optimization Audits

A payroll system optimization audit looks at vendor technology to see how it’s being utilized. Clients not fully utilizing all features within a technology solution are missing out on efficiencies or ways to simplify their process. Sometimes payroll staff are so focused on going live with a new system that they might overlook its functionality, like employee self-service or onboarding features, so they end up paying for features they’re not using.

This type of technology provides more automation for a payroll team. There are automated integrations with third parties that streamline processes, but many businesses still upload data manually. Be sure you’re making use of automation or the use of imports in a system. For example, if all of your employees are getting merit increases, you should create one process utilizing imports and workflows that applies the change to all staff in an automated format.

Payroll Tax Audits

A payroll tax compliance audit identifies inaccuracies in reporting, coding, and configuration on a company as well as employee level. Clients not coding remote workers properly in terms of state and local tax jurisdictions can cause problems.

Incorrect tax configuration for benefit deductions and other taxable fringe benefits are also an issue. Some examples: a deduction for a hospital stay being set up as pre-tax when it should have been set up as post-tax, or an employer HSA not being reported on a Form W2 at the end of the year even though this is required.

For clients expanding into more jurisdictions, you must register for an ID number. However, getting a registration ID can take a long time, and if you don’t get it on time then the vendor isn’t going to be able to file it that quarter. This can result in penalties and interest, so you need to file those appropriately and proactively audit your setups.

Auditing Payroll with a Trusted Partner

Your payroll department helps keep the company running, so shouldn’t your processes be as efficient as possible? A payroll audit is not just about taking action when an agency notices a problem. It’s about proactively fixing current processes while taking remediation steps to clean up what happened in the past. You need a partner with experience tackling payroll audits to guide you through the process.

If you feel that your organization could use some payroll help, OperationsInc has over 20 years of experience in all facets of HR and payroll. Our extremely skilled and experienced staff works with clients across different industries and jurisdictions. We stay up to date on changes within payroll laws and jurisdictional laws and have our finger on the pulse of today’s laws and regulations.

If you’d like to learn more about our Payroll and HRIS Technology services, visit our website or read some of our related articles:

• Common Pitfalls in Payroll Tax Compliance 
• How Does Managed Payroll Outsourcing Work? 
• Employment Audits Now Can Prevent Fines Later 

Reach out today and chat with our experts to discuss your payroll audit.