payroll is likely your organization's largest expense it's also complicated and mistakes make payroll even more costly but you don't have to wait until an employee complains or the government calls to make corrections and stay compliant that's why you need to check yourself before you wreck yourself with a payroll audit in this episode we'll cover how to conduct a payroll audit including why it's important and common mistakes to avoid by the end you'll have a better understanding of how to hold yourself accountable when paying your employees we'll discuss why you need to conduct a payroll audit how to conduct a payroll audit in seven steps and common payroll mistakes to avoid let's get started why you need to conduct a payroll audit so first let's consider why you need to conduct a regular payroll audit simply put the stakes are high you're managing how people get paid their livelihood in fact the government takes it seriously too which is why compliance mistakes can be so costly more specifically a regular payroll audit will help you improve your accuracy stay compliant and find fraud to be clear errors are much more likely than fraud but both can still hit your organization where it hurts an audit is an opportunity to ensure that tax withholding and benefit deductions are up to date incorrect it's also important to revisit your processes for calculating overtime and tip credits employees will often let you know the moment they notice an error on their pay stub and the government will eventually notice repeated or egregious inconsistencies on tax returns but you shouldn't have to wait for someone else to bring payroll mistakes to your attention hr pros must be proactive and a payroll audit can help you hold yourself accountable how to conduct a payroll audit in seven steps before we go any further i would recommend you consider seeking help from your bookkeeper or cpa especially for a more thorough audit that would require payroll accounting the seven steps we'll cover are intended to help you conduct a more limited internal audit for the purpose of improving your processes having said that here's how to audit payroll in seven steps step one limit your scope first depending on the size of your organization it may be impractical to audit every employee's pay for every pay period of the year instead sample a percentage of your workforce to review and establish your time frame for your audit after all payroll is ongoing but your audit cannot afford to be i would recommend basing your time frame on two or more consecutive pay periods in conducting an audit at least once a year step two review employee information much of payroll can be automated but that means incorrect inputs will lead to incorrect paychecks and tax deposits over and over mistakes in employee information are exacerbated by automation look out for changes in pay rates due to a promotion changes to w-4s due to life events and changes in residency that may affect taxes a robust all-in-one hris like party portal can help manage these updates to employee information across hr functions step 3 verify hours worked and days off for hourly workers you should confirm that their time and attendance is correct for pay periods you're auditing don't forget to account for any sick or vacation time that hourly or salaried workers use that may affect their pay misclassification of workers and miscalculating hourly and overtime pay are two of the most common payroll issues investigated by the department of labor's wage and hour division bernie portal has features to help you track time and attendance as well as pto step 4 note any variable pay atypical payments or off-cycle payrolls your payroll audit should also include making sure that any overtime is compensated at one and a half times the regular hourly rate other variable pay to review may include bonuses commissions shift differentials hazard pays signing bonuses recollection pay and corrections from previous payroll mistakes many employers choose to process supplemental wages by running an off-cycle payroll so you'll need to keep that in mind as well step 5 recalculate withholdings and deductions calculating withholdings and deductions can be complicated even when everything goes right in fact we recently devoted an entire episode of hr party of one to just that i'll link to it in the description if you noticed any w-4 or residency changes earlier in the process you'll need to update those calculations to reflect those changes it's also important to double check benefits deductions based on enrollment as well as any changes to hsa fsa or 401k contributions which many employers allow employees to make at any time not just during enrollment step 6 reconcile payroll with accounting bank and tax records earlier i mentioned that you might want to consider working with your bookkeeper or cpa and this step is why many employers find it easier to manage payroll through a bank account separate from their general business account to reconcile payroll with accounting and bank records verify that payroll transaction totals are reflected in your organization's general ledger and in your bank statements you should also double check that your tax deposits were correct and timely using form 941 the irs's quarterly tax return for employers and finally step seven analyze report and improve once you've audited all of your payroll steps we've covered you need to take what you've discovered and make meaningful changes analyze your findings and report on them to leadership have some ideas for improvement when you present the audit results such as updating how timesheets are approved or how bonuses are authorized when you implement these changes clear and specific communication will go a long way in getting your workforce on board five common payroll mistakes to avoid so far we've touched on a few examples of what to look for in a payroll audit but these five common and costly payroll mistakes should definitely be on your radar misclassifying workers according to fair labor standards act non-exempt or hourly workers are entitled to overtime pay at one and a half times their regular rate of pay while exempt or salaried employees or not similarly employees are entitled to certain protections and benefits depending on the employer's size whereas independent contractors are not the difference between hourly and salaried or employee in contractor is not entirely at the employer's discretion i'll link to the dol's guidelines in the description the risks of misclassifying are most often designating a non-exempt worker as exempt which should deny them overtime pay and designating an employee as a contractor which would deny them certain protections and benefits these are topics we've covered in detail on hr party of one i'll link to those episodes in the description miss calculating pay beyond base compensation you also need to factor in supplemental wages such as bonuses and commissions and additional payments such as reimbursements and stipends give employees clear expectations and make sure dates are set up for these payouts overpayment and underpayment are both problematic for more information on what to do if you overpay an employee check out an earlier episode of hr party of one on the topic i'll link to it in the description when running payroll it's also important to make sure the correct premium and contribution amounts are deducted from each paycheck also failing to correctly garnish wages for outstanding debt tax liabilities or child support can lead to problems for the employee and the organization down the line missing pay deadlines one of the biggest mistakes is also one of the most obvious forgetting to run payroll organizations need to follow through on paydays to ensure they aren't putting employees in a pinch the first step to consistently meeting your payroll deadlines is determining your organization's pay schedule there are four main options monthly semi-monthly bi-weekly and weekly some organizations have even started offering on-demand pay for more information on how to choose the best pay schedule for your organization i highly recommend our episode on the topic which i'll link to in the description neglecting tax forms this one seems simple enough but it can also be easy to overlook if you're not using an hris like bernie portal to help you manage payroll and tax information w-4 is need to stay updated in your payroll system to avoid having to issue payroll corrections otherwise employees may get a surprise bill during tax season after the end of the year employers are required to send w-2s to employees and 1099s to contractors and those forms should match your payroll records remember too that employers must file form 941 to report their taxes on a quarterly basis and the last mistake incomplete records the flsa requires organizations to retain payroll records for three years these records keep track of all employee pay information and are crucial to have on hand when an organization is audited it can feel tedious keeping track of payroll data but doing the work up front reduces errors down the line and may prevent your organization from incurring potential fines by now you should have a better understanding of how to hold yourself accountable for best payroll practices through regular audits if you're just getting started in payroll you might be interested in our recent episodes on how to run payroll and how to get your payroll certification i'll link to those in the description as always remember that your role is as strategic as you make it [Music] that's all the time we have for this episode don't forget to subscribe to our channel and ring the bell to get notifications about the latest hr party of one updates and new episodes also join our hr party of one group on linkedin