Proper preparation for a payroll audit includes thoroughly understanding of what the review consists, and many times includes obtaining legal counsel. It also involves employers identifying each and every person that has performed services for them and categorizing these people under an employee or non-employee status. To help avoid legal consequences, it is important that all employers stay on top of their payroll processes, which includes continually comparing payroll reports to general ledgers, as well as reviewing bank reconciliations. Many employers face consequences from a payroll audit because they do not have proper documentation for employees that fulfill more than one job role, making it important for employers to understand separation boundaries and legalities.
There are several reasons as to why a payroll audit may occur, and many businesses begin their preparation by finding and retaining legal counsel. During a payroll audit, a third-party entity informs a business that an audit is going to take place. In doing so, this provides the company being audited with time to prepare. Legal counsel helps businesses to understand what documents should and should not be surrendered to the third-party performing the audit.
Since part of a payroll audit includes the employer providing documentation on each of its employees, it is important to understand the true definition of an employee. An employee is considered someone who has performed services for the company; however, in some instances, there are loopholes that allow an employer to not recognize a person as an employee. This includes when a person is in business for himself or herself, as well as those people who are direct sellers.
It is also important for employers to understand how to classify employees that fulfill more than one job role. When this occurs, employers must have documentation that accurately records how many hours each employee worked in each job role. If documentation is not maintained, then each employee’s total salary is charged according to his or her job role that has the highest-rated classification.
The entity performing the audit will also want to make sure that the company being audited has payroll reports that match up with its general ledgers. To prepare for this portion of the payroll audit, companies should always compare gross payroll expenses, net check amounts, and any taxes withheld from employee’s checks with all of the numbers on their general ledgers. Furthermore, to help with audit preparation, it is beneficial to compare both payroll reports and general ledgers with bank reconciliations. Comparing all of these numbers helps an employer to make sure that there are no alterations occurring on employee’s checks.