Proper preparation for a payroll audit involves understanding the process, identifying employee status, maintaining accurate documentation, and comparing payroll reports with general records. Legal counsel can help businesses prepare and understand which documents to provide. It’s important to accurately classify employees who fill multiple job roles and maintain accurate records to avoid legal consequences.
Proper preparation for a payroll audit includes a thorough understanding of what the audit is all about and many times includes obtaining counsel. It also involves employers identifying each person who has performed services for them and classifying these individuals into employee or non-employee status. To avoid legal consequences, it is important that all employers keep up with their payroll processes, including the ongoing comparison of payroll reports with general records, as well as the review of bank reconciliations. Many employers face the consequences of a payroll audit because they do not have adequate documentation for employees in more than one job role, making it important for employers to understand boundaries and the legality of separation.
There are several reasons 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 will take place. In doing so, this gives the audited company time to prepare. Legal Counsel helps companies understand which documents should and should not be handed over to the third party who performs the verification.
Since part of a paycheck includes the employer providing documentation about each of its employees, it’s important to understand the true definition of an employee. An employee is considered to be someone who has performed services for the company; however, in some cases, loopholes exist that allow an employer not to recognize a person as an employee. This includes when a person is in business for themselves, as well as those people who are direct sellers.
It is also important that employers understand how to classify employees who fill more than one job role. In this case, employers must have documentation that accurately records how many hours each employee has worked in each job role. If documentation is not maintained, each employee’s total salary is charged based on their highest ranked job role.
The auditing entity will also want to ensure that the audited firm has payroll reports that match its general records. To prepare for this part of the payroll audit, companies should always compare gross payroll expenses, net check amounts, and all taxes withheld from employee checks against all the numbers on their general records. Also, to aid in audit preparation, it is helpful to compare both payroll reports and general ledgers with bank reconciliations. Comparing all of these numbers helps an employer make sure there are no tampering with employee checks.
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