Payroll Audit

Context

• Payroll: largest organizational expense.
• High stakes: employee livelihoods and government compliance.
• Payroll audit: proactive measure to ensure compliance and accuracy.

Why Conduct a Payroll Audit

1. High Stakes: Payroll manages how people get paid, directly affecting their livelihood.
2. Government Compliance: Mistakes can result in costly penalties.
3. Error vs. Fraud: Errors are more common but both can be costly.
4. Update Accuracy: Ensures tax withholding and benefit deductions are up to date.
5. Revisit Processes: For calculating overtime and tip credits.
6. Proactiveness: Avoid waiting for employee complaints or government notice.

How to Conduct a Payroll Audit in 7 Steps

1. Limit Your Scope:

   • Sample a % of workforce for review.
   • Establish time frame (e.g., 2+ consecutive pay periods once a year).

2. Review Employee Information:

   • Validate automated inputs for pay rates, W-4 changes, residency effects.
   • Tools: HRIS like BerniePortal.

3. Verify Hours Worked and Days Off:

   • Confirm time and attendance records.
   • Account for sick/vacation time affecting pay.
   • Avoid worker misclassification and incorrect overtime calculations.
   • Tools: BerniePortal for tracking time/attendance and PTO.

4. Note Variable Pay and Off-Cycle Payrolls:

   • Verify overtime at 1.5x rate, bonuses, commissions, hazard pay, etc.
   • Manage supplemental wages and off-cycle payrolls.

5. Recalculate Withholdings and Deductions:

   • Update W-4 or residency changes.
   • Double-check benefits deductions, HSA, FSA, 401(k) contributions.

6. Reconcile Payroll with Accounting, Bank, and Tax Records:

   • Use a separate payroll bank account.
   • Verify payroll totals in general ledger/bank statements.
   • Ensure correct/timely tax deposits using IRS Form 941.

7. Analyze, Report, and Improve:

   • Analyze findings, report to leadership.
   • Propose improvements for timesheet approval, bonus authorization, etc.
   • Communicate changes clearly to workforce.

Common Payroll Mistakes to Avoid

1. Misclassifying Workers:

   • Non-exempt (hourly) vs. exempt (salaried) worker classification.
   • Employee vs. independent contractor.
   • Risks of misclassifying: loss of overtime pay, certain protections, and benefits.

2. Miscalculating Pay:

   • Include bonuses, commissions, reimbursements, stipends, etc.
   • Ensure correct premium and contribution deductions.
   • Properly handle wage garnishments.

3. Missing Pay Deadlines:

   • Ensure timely payroll processing.
   • Determine and follow pay schedule: monthly, semi-monthly, bi-weekly, weekly.
   • Consider on-demand pay options.

4. Neglecting Tax Forms:

   • Keep W-4 updated to avoid payroll corrections.
   • Send W-2s to employees, 1099s to contractors annually.
   • File IRS Form 941 quarterly.

5. Incomplete Records:

   • Retain payroll records for at least 3 years as per FLSA.
   • Ensure accurate record-keeping to reduce errors and avoid fines.

Conclusion

• Regular payroll audits are vital for compliance and efficiency.
• Importance of proactive payroll management to avoid common mistakes.
• Suggestions for further resources and how to stay updated with payroll management.