No small business task seems more complicated than payroll, especially since the risk of error can be high. However, you can take proactive steps to reduce the risk of error by performing a payroll audit (or payroll compliance audit). Let’s start with the key reasons to conduct a payroll audit and how to do one.
Reasons you should do a payroll audit
Conducting an audit can be time-consuming, but as a small business owner, you should do one annually (at least) to uncover errors and ensure you’re meeting these requirements for payroll accounting:
Comply with employment laws
Employment laws can be complex and varied, depending on your location and industry. However, regardless of where your business operates, certain basic laws apply to all employers. These laws help protect employees from discrimination, ensure fair pay and benefits, and prevent workplace harassment.
An audit of your payroll will confirm you’re complying with these key payroll laws:
- Keeping payroll records on file for a minimum of three years
- Maintaining accurate minimum wage
- Overtime pay requirements
- Following your state’s employment laws
Payroll audits can protect your business from legal and financial risks but also
Report and pay taxes
If you’re a business owner, you understand the importance of paying taxes on time. The IRS and state departments of revenue require businesses to file accurate payroll tax returns and submit taxes withheld from pay.
However, it’s not just about ensuring you don’t get in trouble with the IRS. You will also have to make tax filings (and deposits) for Social Security, Medicare, and unemployment compensation programs.
If you set up your payroll process correctly, you’ll be able to file returns and make deposits in a timely manner—avoiding fees and penalties.
Ensure employee data is accurate
You want to pay your workers accurately—and they need reliable payroll information to file a personal tax return. You’ll need to confirm that the pay rate, vacation days, and paid time off benefits are accurate.
When you issue 1099s and W-2s, they must be correct. If not, you’ll have tax issues for workers who rely on your tax forms. An audit can also help find people on your payroll who your company no longer employs.
You may also uncover a fictitious payee, or ghost employee, who does not exist. This fraud happens when an employee adds a fake worker to the payroll records to collect the payments for themselves.
How to conduct a payroll audit
Payroll audits confirm the accuracy of the payroll records. Conduct the audit by comparing these records:
- Employee payroll data
- Payroll tax filings and tax deposits
- Banking activity
- Accounting records
Employees can request a payroll audit of their data if they believe that an error took place. Encourage your workers to contact you if they are uncertain about their payroll information.
1. Review employee payroll data
The first step in a payroll audit is to review employee payroll data. Here’s the key payroll data you’ll want to look at:
- Worker’s employment: Confirm that you’ve collected a Form W-4 for the employee to ensure correct tax withholdings. Both employees and independent contractors must complete a Form W-9 with a Social Security number or an Employer Identification Number (EIN). These steps confirm the existence of the worker.
- Pay rate: Verify the pay rates for salaried and hourly workers, including the overtime pay rate, if applicable. If the worker took vacation days or paid time off, verify that the human resources records and payments are correct.
- Gross pay: For salaried workers, gross pay is the annual salary divided by pay periods. For hourly workers, check the hours worked on the employee’s time card. Multiply the hours worked by the hourly pay rate.
Reviewing payroll data is essential for identifying discrepancies, fraud, and errors while ensuring compliance with legal requirements and improving overall payroll processes.
2. Check tax forms and deposits
Next is verifying that all tax forms and deposits are accurate and up to date. This step is essential for complying with tax laws and avoiding penalties or fines.
In particular, check your Form 941, which reports federal income tax withholdings to the IRS, for:
- Each employee: Confirm that the employee is on Form 941 and that you employed them for the entire quarter.
- Tax withholdings: Review the worker’s gross pay for the quarter, and confirm that the Form W-4 information was properly used to calculate withholdings.
- Tax deposits: Check the tax deposit details and verify that the correct dollar amount of withholdings was submitted for the worker.
Also, ensure you make all your tax deposits with the appropriate authorities within the designated time frame, such as Social Security and Medicare taxes.
3. Look at banking activity
To conduct a thorough payroll audit, take a close look at your bank statements. By examining the bank activity, you can verify that your payments to employees were timely and accurate.
Even if you outsource payroll, it’s important to match employee payment records. Mistakes by payroll service providers happen, which can end up resulting in fines for the company.
4. Confirm accounting records
The final step is to confirm that you record all payroll expenses properly in the company’s accounting software and that the data matches bank statements.
Ensure all payments to employees are accurate and that there are no discrepancies between what is in the company’s books and payments.
Common payroll audit questions answered
Conducting a payroll audit can help uncover errors and identify opportunities for improvement in the payroll process. Here’s what to expect when starting a payroll audit process:
How often should you conduct a payroll audit?
It depends on various factors, such as the size of the business, the complexity of the payroll process, and the risk of payroll fraud or errors. But here’s a general guide:
- Annually: For small businesses with a straightforward payroll process and few employees. This will still help ensure that payroll records and accounting processes are accurate and compliant with applicable employment laws.
- Quarterly: For bigger companies with more complex payrolls, frequent payroll audits are necessary.
Conducting payroll audits on a more regular basis can help identify any errors or discrepancies so you can quickly address them. It can also help prevent payroll fraud and ensure that all employees get accurate pay.
If there are concerns of fraud or errors, for example, conducting an immediate audit is necessary to minimize any potential financial losses and ensure accurate financial reporting.
How long does it take to do a payroll audit?
For small businesses with a straightforward payroll process, a payroll audit can typically be completed in a few days. This simple audit typically involves reviewing payroll records, bank statements, and other financial documents to ensure compliance with employment laws and identify any errors or discrepancies
For larger businesses with more complex payroll processes and more employees, the payroll audit process can take several weeks. These audits may require a more comprehensive review of payroll records, which can include reviewing payroll registers, employee time cards, tax withholdings, and overtime hours.
What is an IRS payroll audit?
An IRS payroll audit is an examination conducted by the IRS to determine the accuracy of an organization’s payroll process, tax withholdings, and compliance with employment tax laws. During the audit, the IRS may review payroll records, employment tax returns, W-2 and 1099 forms, and other relevant financial documents.
What happens if you fail a payroll audit?
If a company fails a payroll audit, it can have serious consequences and result in financial losses for the company. The company may have to pay penalties, fines, back taxes, and interest. Additionally, failing a payroll audit can damage the company’s reputation and result in a lack of trust from employees and stakeholders.
What is an example of a payroll audit report?
A payroll audit report is a comprehensive document that outlines the findings of a payroll audit. This report is essential for businesses as it provides insight into their payroll processes, identifies errors or issues, and recommends improvements to ensure compliance with employment laws.
An example of a payroll audit report may include a summary of the audit findings, an assessment of the accuracy and completeness of payroll records, and a review of employee pay rates and related tax withholdings. The report may also include a review of the company’s payroll policies and procedures to identify areas that require improvement.
Additionally, the payroll audit report will include recommendations, like implementing new procedures, improving payroll employee training, or upgrading the company’s payroll software.
Payroll audit best practices
You’ll get the most benefit out of conducting annual payroll audits by using best practices. These tips will help you conduct a payroll audit accurately and quickly:
- Get external audits: Hire a CPA firm to conduct an external payroll audit every few years. When you hire a third party to perform the audit, you eliminate the risk of an employee concealing payroll data to commit fraud.
- Keep the duties of the human resources department and the accounting department separate: A human resources employee should not be able to post accounting entries. Similarly, no bookkeeper should be able to change employee payroll records.
- Create a formal payroll audit report: This will allow you to get the information in the same format each time. This consistency makes it easier to review the data. If the hours paid don’t match the time tracking and attendance report, you can process retroactive pay for the employee and correct the payroll records.
- Document processes: Your payroll audit processes should be kept in a procedures manual, so your team knows how each task is performed and who is responsible.
As a business owner, it’s critical to understand the basics of a payroll audit and how to conduct it—these best practices will ensure a smooth process.
This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.
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8 ways to get the best credit score you can
Learning how to achieve and maintain a good credit score is a crucial part of your financial health. Not only can it be a badge that says your financial life is in good shape, it can also help you access credit and get approved for loans and insurance at more competitive rates. Being approved for lower interest rates and premiums can in turn save you tens of thousands of dollars over your lifetime.
A solid credit score can also have other perks, such as helping you get approved for products with better features, such as rewards credit cards.
While there’s no one size fits all solution on how to keep a good credit score, there are some best practices you can follow. Read on to learn more about this topic and actual tactics, including:
- What is a credit score?
- How can you maintain a good credit score?
- What are tips to keep your credit score high?
- How can new credit card users establish a credit score?
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A credit score is a three digit number ranging from 300 to 850 that is an indicator of your credit behavior. Your score is calculated based on your credit history from all three credit bureaus — Experian, Equifax, and TransUnion — and is based on how lenders may perceive your risk as a borrower.
What exactly does that mean? By reviewing your past use of credit, your score reveals if you are more or less likely to pay back your loans on time. If you are more likely to repay your debts in a timely manner, the less risky you are.
The higher your credit score, the more creditworthy you are in the eyes of lenders.
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Several factors can affect your credit score, such as your payment history, the number of loan or credit applications submitted, and the age of your accounts you hold. There are also different scoring models, such as FICO vs. VantageScore. Each weighs factors differently to arrive at a credit score.
Meaning, there may be some differences in your credit score.
Lenders may look at one credit score or all of them, plus different qualification criteria when deciding whether to approve you for a loan and at what interest rate.
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Though there are different credit scoring models, most use similar financial behaviors to calculate them.
They’re grouped in the following categories:
- Payment history: This factor is one of the most important factors in your credit score as it assesses whether you’re likely to pay your loan on time. Credit scoring models will look into current and past account activity, including any late or missed payments.
- Amounts owed or available credit: The percentage of the available balance you’re using is your credit utilization. The more you are using available credit in your revolving accounts (like your credit cards and lines of credit), the more it could appear you rely too much on credit. This can make you look like a risky person to whom to lend.
- Age of credit history: The longer your credit history, the more a lender can look into your credit behavior. It’s usually considered good to have a long credit history vs. a very short or recent one.
- Account types: Having a different mix of loans offers more insight into how you handle various accounts. Credit-scoring models may not, however, use this as a major factor when calculating your score.
- New or recent credit: The more recent applications you submit for new loans or credit accounts, the more risky you may appear to be. That’s because it may look like you need to rely on credit; that you are quickly trying to acquire different forms of access to funds.
(There are some exceptions, such as shopping around for mortgages within a short span of time.)
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Understanding the importance of a good credit score and what goes into it can help you protect the one you have. The following are eight suggestions on how to maintain a good credit score.
1. Pay Your Credit Card Bills on Time
Ensuring you’re on top of your bills (not just your credit cards) will help keep a positive payment history in your credit reports. This is the single biggest contributing factor to your credit score at 30% to 40%. Consider setting up automatic payments or regular reminders to ensure you’re paying on time.
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Your credit utilization is the percentage of the available limit you’re using on your revolving accounts like credit cards. Basically, you don’t want to spend close to or at your credit limit. A good rule of thumb to follow is to now use more than 30% of your overall credit limit.
So if you have one credit card with up to $10,000 as the limit, you want to keep your balance at $3,000 or lower.
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Even if you don’t use your older credit cards that often, keeping them open means you can maintain your long credit history. Consider charging a small or occasional amount, whether an espresso or gas station fuel-up, to ensure your account stays open. This can reassure prospective lenders that you have been managing credit well for years.
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Consider this as you try to keep a good credit score: Go slow. Since credit-scoring models look at the number of times you apply for new credit, only open one when you really need it. Stay strong in the face of offers to get free shipping or 10% off if you sign up for a card that many retailers promote.
Spreading out your applications is a good idea rather than regularly or heavily putting in a lot of card applications. By moving steadily and choosing a credit card and other types of funding carefully, you likely won’t raise red flags, such as that you need to rely heavily on credit.
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Mistakes can happen, and errors in your credit reports could negatively affect your score. You can get your credit reports for free at AnnualCreditReport.com from all three credit bureaus.
It’s wise to check your credit scores regularly, which won’t impact your score. If you see an error — whether it’s an account you don’t own or a bill marked unpaid that you know you took care of — dispute it as soon as possible.
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Making payments in full will help you maintain a positive payment history and lower your credit utilization. Both of these can maintain your creditworthiness and save you money on interest charges.
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Closing your old credit cards could shorten your credit history. It could also increase your credit utilization because it will lower your available credit limit. Even if you make the same amount in purchases, your credit utilization would go up when your credit score updates.
For example, if you currently have an overall credit limit of $28,000 and you have $7,000 in credit card balances, your credit utilization is 25%. If you close a credit card which had a $7,000 limit, you then lower your total available credit to $21,000 your credit utilization will go up to 33%.
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It can be hard to say no to an invitation to try a pricey new restaurant or not tap to buy when scrolling through social media. But when you let your spending get out of hand, you may use your credit cards too much. It can feel like free money in the moment — but you still have to pay it back. If you overextend yourself, you may find it hard to pay your balance on time and risk a late or missed payment.
Instead, spend only what you can afford and try to avoid lifestyle creep (having your spending rise with your pay increases or even beyond them). That can help provide some guardrails for using credit cards responsibly.
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Trying to establish a credit score can be a challenge since, ironically enough, you need credit to build credit.
If you are in this situation, there are several options to pursue, such as the following:
- Open a secured credit card: A secured credit card is one where you’ll put down a refundable cash deposit that will act as your credit line. You can use this to establish credit and apply for an unsecured credit card. Some issuers will upgrade you once you make consistent on-time payments for a predetermined amount of time.
- Apply for a credit builder loan: These types of loans are specifically geared towards helping you establish and build credit over time. Instead of getting the loan proceeds like a traditional loan, the funds are held in an escrow account until you pay back the loan in full.
- Become an authorized user: You can ask a loved one, like a parent or even a close friend, if they’re willing to add your name on their credit card account. Doing so means the credit account will go in your credit history. Of course, that doesn’t give you access to use their account without restraint. The guardrails can be established between you and the original card holder.
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Maintaining a good credit score (and keeping that score high over time) comes with perks such as increasing the likelihood of getting approved for loans at more favorable terms. You might qualify for lower interest rates, saving you a considerable amount of money over time.
Using a credit card wisely is one of the ways you can build and maintain your credit score. But that’s not all there is to opening a credit: You also likely want one with great perks.
This article originally appeared on SoFi.comand was syndicated by MediaFeed.org.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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