Proper preparation for a payroll audit includes understanding the review, obtaining legal advice, identifying employees, and categorizing them. Employers should continually compare payroll reports to general ledgers and review bank reconciliations to avoid legal consequences. Legal counsel helps companies understand which documents to provide during an audit. Employers must accurately document employees who fulfill multiple roles to avoid overcharging. Finally, companies should compare payroll reports, general ledgers, and bank reconciliations to ensure no changes in employee checks.
Proper preparation for a payroll audit includes a thorough understanding of what the review consists of and often includes obtaining legal advice. It also involves employers, identifying each person who has provided services for them and categorizing these people under employee or non-employee status. To help avoid legal consequences, it’s 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 adequate documentation for employees who fulfill more than one role, making it important for employers to understand the boundaries and legalities of separation.
There are several reasons why a payroll audit might occur, and many companies begin their preparation by finding and retaining legal counsel. During a payroll audit, a third-party entity informs the company that an audit will be performed. By doing so, this provides the company being audited with time to prepare. Legal advice helps companies understand which documents should and should not be handed over to the third party performing the audit.
As part of a payroll audit includes the employer providing documentation for each of its employees, it is 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, there are loopholes that allow the employer not to recognize a person as an employee. This includes when a person is in business for themselves as well as for people who are direct sellers.
It is also important for employers to understand how to categorize employees who fulfill more than one role. When this occurs, employers must have documentation that accurately records how many hours each employee has worked in each role. If documentation is not maintained, each employee’s total salary will be charged according to the highest ranked job.
The entity performing the audit also wants to ensure that the company being audited has payroll reports that match its books of account. To prepare for this part of the payroll audit, companies should always compare gross payroll expenses, net check amounts, and any taxes withheld from employees’ checks with all numbers in their general accounts. Also, to aid in audit preparation, it is beneficial to compare payroll reports and general ledgers with bank reconciliations. Comparing all these numbers helps the employer to ensure that there are no changes in employee checks.
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