According to Nancy, “A payroll audit helps identify inefficiencies or discrepancies in payroll processes.” She suggests an internally initiated payroll audit is “a proactive way to ensure accurate employee classifications, tax calculations and deductions.” With the emergence of dedicated payroll software, these audits have become significantly less cumbersome, allowing for audits to be conducted as frequently as a company deems necessary. “Depending on business requirements and legal changes, audits can be regular or on an as-needed basis,” Sanchez said. Larger companies with more complex payrolls may want to schedule audits as regularly as every quarter, while smaller companies could reasonably conduct these less frequently, such as annually.

How to Begin a Payroll Audit

One of the most important aspects of payroll is to ensure you’re actually paying the right people! Take time to review your payroll roster in comparison to the employee roster in your HRIS. Ask yourself the following questions:

• Are there employees on your payroll roster that are no longer with the company?
• Are there employees whose hours have been reduced or increased?
• Have any employees recently returned from or gone out on an unpaid (or partially paid) leave of absence?

It would be even more effective for payroll and HR teams to work together to ensure that nuances and discrepancies are identified. Sanchez recommends that accounting and HR teams “[Collaborate to] confirm [that] employee data, benefits and deductions match payroll records.”  She suggests that “it’s also important to cross-check time sheets with pay data and document any audit findings for follow-up action.”

 

PTO Policies and Their Payroll Impact

PTO has been a hot topic these past few years as companies have navigated how much PTO to offer employees. Some companies have elected to offer unlimited PTO, and others have grappled with how much PTO to offer to remain realistically competitive. No matter what, PTO has a significant impact on payroll, and it’s not just vacation time. Many states have sick leave laws that must be accounted for. When conducting a payroll audit, consider the states in which you operate. Are you in compliance with mandated sick leave accruals? Do you have a process for tracking sick leave earned and used?

It’s also important to ensure your time off tracking systems are functioning correctly. Are you properly accruing time off, as well as properly tracking the time being taken by each employee? If these systems are online, make sure all automations are functioning correctly, and ensure that your payroll system is receiving the data it needs to pay out PTO balances as required when the time comes.

 

Deductions, Deductions and More Deductions

As any payroll specialist knows, there are several deductions in any given paycheck. Whether they are taxes, benefits deductions, or wage garnishments, deductions have a significant impact on an employee’s pay. When conducting a payroll audit, it’s time to take a careful look at deductions and consider the following:

• Are the proper taxes being withheld? In most cases, payroll software manages tax deductions to maintain compliance, but it’s important to review and ensure that these automations are functioning as intended. For example, many companies allow employees to update their withholdings on an as needed basis. Making sure that any changes made are properly reflected in the payroll is an important audit task.
• Are the proper benefits deductions being withheld? Benefits deductions can change frequently throughout the year, and unfortunately, this can allow for more frequent errors. It’s important for company balance sheets to be sure that employees are paying the required portion of their benefits. This will be a helpful time for payroll and HR teams to work together, comparing bills from benefits vendors to what’s reflected in the payroll system. Much like ensuring benefits deductions are in place, it’s just as important to be sure an employee is not being charged for a benefit in which they’re no longer enrolled. A helpful time to audit benefits deductions might be:
  • after a major open enrollment period.
  • after a hiring influx.
  • toward year end, when changes to things like 401k withholdings might be more common.
• Are wage garnishments up to date? While typically less common, you don’t want to mess around with wage garnishments. Because most garnishments are court ordered, it’s important to ensure garnishment records are up to date and that payroll records reflect any changes.

Internal payroll audits are a helpful tool in maintaining compliance in a complex and frequently changing employment landscape. Nancy notes, “Regular audits can help prevent costly errors, such as missed tax filings or overpayments, and ensure compliance with changing payroll laws.” While payroll audits can be time consuming, they can prevent larger, more stressful audits (like those requested by outside agencies!) and let’s face it – that will always pay off!

Planning, correctly entering and then completing payroll compensations is a major factor in every business, regardless of the number of personnel. For most companies, payroll is their firm’s largest business expense. Therefore, it’s vital that payroll is being processed sufficiently by professionals with this exclusive capability. Outsource your payroll to a premier and trusted company like Flex HR.