A Review of Common Payroll Risks and their Most Effective Controls
According to the IRS, approximately 40% of small to medium-sized businesses are forced to pay a payroll penalty annually. Whether you are one of the largest or smallest organizations, you are susceptible to experiencing payroll errors that culminate in fines, penalties, and at times, litigation.
Shield Yourself from Fraud and Human Error
Businesses that run their own payroll – instead of getting in touch with a Lincoln Nebraska payroll management company for their services – run a much higher risk of falling victim to and getting disrupted by fraudulent activity and human error. The issues may range from ghost employees to buddy punching to hour padding; when a company lacks effective internal mechanisms for managing its payroll, it can run into significant trouble.
If you want to avoid such devastating outcomes, read on to find out the common payroll risks and the finest controls that the best Lincoln payroll management services can help you employ – to avoid running the risks.
Common Payroll Risks
Ghost employees only exist on paper, are dead but still remain on the payroll or real people, or don't work at the business that sends them paychecks. Those who exist but don't work at the company typically split the paycheck with an employee of the company perpetuating the crime. Most often than not, it is usually the person who manages the payroll.
Padding hours occur when a person lies about the actual time they've worked. Allowing your employees to enter the length of time they've worked manually makes it easy for fraud to occur – mostly if employees work remotely or with minimal managerial oversight.
Buddy punching is easily perpetrated when a company has in-house systems. It occurs when an employee clocks in on behalf of another. Apart from fraud, in-house systems are also at risk of human error, which an automated system can easily detect and correct.
Other common payroll risks include:
- Incorrect classification (classifying freelancers and contractors as employees, therefore paying taxes on them).
- Inadequate security that's vulnerable to hacking.
- Lack of focus on compliance with employer/employee relationship laws.
Payroll Controls that Can Guard You Against These Risks
To keep your business safe from these risks, you can get in touch with us for the unmatchable payroll services and risk management. However, if you're running a manual payroll, here are few controls that you can run to shield your business:
Carrying Out Audits, Changing Logs, and Segregating Duties
This humongous task entails:
- Controlling the access to data by having an independent auditor check the company books periodically.
- Only allowing crucial changes to employee information by staff with minute-tracked password access.
- Having a single person prepare the checks, another authorizing, and another running the checks.
Once one person does your manual payroll, have an independent person review the numbers to ensure that everything is perfect.
Check Payment Controls
Change the check authorizers the moment they exit your business. Hand checks are effective in preventing paying ghost employees. Have a separate checking account for paying employees to confirm that it reflects your books' calculations.
Running Regular Variance Analyses
Ensure that you run payroll variance analysis monthly. Split data by department, division, or function, and run the outcome against your budget and previous year. You can then investigate inexplicable differences. If you want to trace additional outliers, check the salary per FTE, employee benefit ratios, and payroll tax ratios.
Should running a payroll be this complicated? No. With the best payroll and HR manager in Lincoln, NE, it isn't. If you feel like your entire system needs an expert eye, you would also benefit from professional management consulting services.
You can save yourself hours of human resources and alleviate compliance risk by having your payroll process handled by Payroll managers in Lincoln, NE. Contact Small Business Accounting & Tax, Inc. for a free consultation and financial services at affordable rates.
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