How do I prepare for a payroll audit?

To help avoid legal consequences, it is important that all employers maintain control of their payroll processes.

Proper preparation for a payroll audit includes a thorough understanding of what the review is and often includes obtaining legal advice. It also involves employers identifying each person who has provided services to them and categorizing those people as employed or non-employed. To help avoid legal consequences, it is important for all employers to maintain control of their payroll processes, which includes continually comparing payroll reports to the general ledger, as well as reviewing bank reconciliations. Many employers face the consequences of a payroll audit because they do not have adequate documentation for employees who perform more than one job role, making it important for employers to understand the boundaries of separation and legalities.

There are several reasons why a payroll audit may occur, and many companies begin their preparation by looking for and hiring an attorney. During a payroll audit, a third party informs a company that an audit will be performed. By doing so, it gives the company being audited time to prepare. Legal advice helps companies understand which documents should and should not be handed over to the third party responsible for the audit.

Since part of a payroll audit includes the employer providing documentation about each of their employees, it is important to understand the true definition of an employee. Employee is considered to be one who 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 on their own as well as those people who are direct sellers.

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It is also important for employers to understand how to classify employees who perform more than one 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, each employee’s total salary will be charged according to their highest ranked job function.

The entity performing the audit also wants to make sure that the company being audited has payroll reports that match its accounting books. To prepare for this part of the payroll audit, companies should always compare their gross payroll expenses, net check amounts, and any taxes withheld from employees’ checks against all the numbers on their ledgers. Also, to help with audit preparation, it is beneficial to compare payroll reports and general ledger with bank reconciliations. Comparing all these numbers helps the employer make sure that there are no changes taking place on the employees’ checks.

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