Payroll Audit Checklist

Ensure that employee records, including names, addresses, and tax identification numbers, are accurate. Compare payroll records with employment files to confirm that only current employees are listed. Remove any individuals who are no longer employed.

Properly categorize employees as full-time, part-time, or contractors to ensure they receive the correct compensation. Their wages should align with their work schedule, whether full-time or part-time.

Confirm the accuracy of hiring and termination dates to maintain precise records. Additionally, check each employee’s current status to ensure they are correctly classified as full-time or part-time.

Establish a clear process for reviewing and approving payroll before salaries are distributed. This process typically includes data entry, verification, managerial review, and final authorization. For instance, a payroll officer may prepare the payroll, a manager might review it for accuracy, and a senior executive or director may provide the final approval.

A well-structured payroll schedule ensures employees receive their wages on time under company policies. Reliable and predictable payroll cycles, such as weekly, fortnightly (bi-weekly), or monthly pay periods, help reduce financial stress and may enhance job satisfaction and productivity.

Maintain detailed records of salary adjustments, including promotions, pay raises, and employee terminations. Clearly define the criteria for wage increases, performance-based bonuses, and commission structures, ensuring transparency and consistency in payroll management.

Ensure that employees receive the exact pay rate stated in their employment contracts. The agreed-upon salary or hourly wage must align with the terms that the employer and the employee accepted.

Confirm that all wages are accurately calculated based on hours worked. Overtime payments should comply with company policies and labor laws, ensuring employees receive the correct compensation for extra hours worked.

Verify that employees are paid correctly based on their work hours and employment classification. Since pay structures vary according to contracts and job roles, it is essential to ensure that compensation is calculated accurately for each individual.

Ensure that payroll processes adhere to all applicable tax regulations at the federal, state, and local levels. Tax withholdings must be correctly calculated and applied in compliance with labor laws.

Employers must accurately report and submit federal and state payroll taxes to the relevant tax authorities. This includes correctly documenting employee income, tax withholdings, and employer contributions while maintaining the necessary records as required by law.

Employers are responsible for providing employees and contractors with proper tax forms, such as W-2s and 1099s, which detail their earnings and tax withholdings. Additionally, organizations must ensure compliance with any state-specific reporting requirements.

Ensure that deductions for employee benefits, such as health insurance and retirement plans, are correctly applied. Employees should be provided with clear options for voluntary deductions.

Verify that the correct deduction amounts are withheld from employee paychecks and that these contributions, along with employer contributions in that particular plan - if any, are submitted on time and to the appropriate benefit provider(s).

Employers must comply with court-ordered deductions by withholding the required funds from an employee’s paycheck to fulfill financial obligations such as child support, student loan repayments, or tax levies.

If multiple employees have identical time entries, it may indicate different adjustments to time records. HR should investigate any signs of time theft, such as "buddy punching," where employees clock in for one another.

Employers must ensure that time off is accurately recorded in payroll, distinguishing between vacation, personal leave, sick leave, or bereavement leave. If employees are entitled to a fixed amount of PTO, deductions should be made accordingly. Additionally, overtime pay must be calculated correctly, and any discrepancies should be corrected by adjusting payroll records and issuing back pay if necessary.

Confirm that recorded work hours in the time and attendance system align with payroll records to prevent errors and ensure accurate compensation.

Verify that payroll records align with bank statements and general ledger accounts to identify any inconsistencies or errors.

Employers should ensure that their net income reflects the correct deductions subtracted from their gross pay. Any discrepancies in these calculations could indicate payroll errors or potential fraud.

Maintain detailed records of any manual payroll adjustments or corrections, along with automated systems in place. A payroll audit report should be prepared and shared with key personnel, including HR and Finance leadership, to ensure transparency and accountability.

Confirm that payroll transactions match corresponding entries in bank statements and general ledger accounts to maintain financial accuracy.

Cross-check payroll records with the company’s general ledger to ensure payroll expenses align with audit findings. Any inconsistencies should be investigated and corrected.

Ensure all records for direct deposits and manual payroll payments are properly documented and accessible. Organizing these records in advance helps streamline the audit process and quickly identify discrepancies.

Ensure that all payroll procedures comply with the labor laws and tax regulations at the federal, state, and local levels, whatsoever/as many as apply to your company per law.

According to the Fair Labor Standards Act (FLSA), non-exempt employees must receive overtime pay at a rate of 1.5 times their regular wage for any hours worked beyond 40 hours in a week. The law does not restrict the number of hours employees aged 16 and older can work per week, nor does it mandate overtime pay for weekends or holidays unless extra hours are worked.

When hiring new employees, it is essential to classify them correctly under the FLSA as exempt or non-exempt. Exempt employees are not eligible for overtime pay, regardless of how many hours they work beyond 40 in a week. In contrast, non-exempt employees must be compensated for overtime, no matter their salary level. Effective July 1, 2024, employees classified under the executive, administrative, or professional (EAP) exemption must earn at least $844 per week, increasing to $1,128 per week on January 1, 2025. Similarly, highly compensated employees must earn $132,965 annually starting July 1, 2024, with the threshold rising to $151,164 by July 1, 2025 to remain exempt from overtime.

Payroll system access should be limited to only those employees who require it for their job responsibilities. Restricting access minimizes the risk of fraudulent activities. As a security measure, each user should have a unique login, with all system activity tracked and logged to maintain accountability.

Encrypting payroll information ensures that even if unauthorized individuals gain access, the data remains unreadable without the appropriate decryption key. This adds an extra layer of security, safeguarding employee information from potential breaches.

It is essential to review system access logs, verify that all security updates are applied, and confirm that backups are performed correctly. Regular audits help identify vulnerabilities before they become major issues and reinforce the organization’s commitment to protecting employee data.

Tracking year-to-date payroll expenses allows businesses to assess how much of their overall budget is allocated to employee wages. It helps identify which departments have the highest payroll costs and whether there is room for additional hiring. Additionally, it enables companies to detect any inconsistencies and address them promptly.

Conducting routine payroll audits helps organizations avoid expensive mistakes, such as failing to file taxes on time or overpaying. These audits also ensure ongoing compliance with evolving payroll regulations.

Employers must provide employees and contractors with tax documents, such as W-2 and 1099 forms, detailing their earnings and tax withholdings. Additionally, businesses must comply with any applicable state-specific reporting requirements.

Many businesses outsource payroll management to third-party providers. Employers must regularly evaluate the efficiency and reliability of these service providers to ensure payroll processes run smoothly.

It is essential to confirm that third-party payroll providers are fulfilling their contractual obligations and adhering to the agreed-upon service terms.

Employers must ensure that payroll service providers handle employee data responsibly, protecting it from unauthorized access or misuse.

Pinpoint recurring challenges such as employee misclassification, incorrect salary calculations, or delayed tax filings. Addressing these issues early can help reduce the risk of fines and ensure payroll audits focus on critical problem areas.

Employers can enhance payroll efficiency by investing in automation tools that handle salary calculations, tax deductions, and payments. Automating these processes improves accuracy, minimizes human error, and saves time and resources.

Assess and update payroll policies, with regular intervals, to align with evolving security risks and technological advancements. Ensure all policies are well-documented and easily accessible to employees.

Maintaining thorough records of all payroll modifications helps prevent future discrepancies and ensures compliance during audits.

An audit trail provides a detailed, step-by-step record of payroll transactions, allowing employers to trace financial data back to its source. This is essential for verifying the accuracy of salary payments, whether fixed or variable.

Businesses are advised to compile a detailed report summarizing payroll audit findings. Based on these insights, they can implement improvements such as upgrading payroll software, strengthening internal controls, or revising company payroll policies.

Internal auditors must ensure the accuracy of employee records, including addresses, tax identification numbers, and employment details.

Incorrectly categorizing employees as independent contractors or exempt workers can lead to compliance violations, affecting overtime pay, benefits, and legal protections. Such errors can result in severe financial and legal consequences, making thorough classification reviews essential.

Ensure that employee records are up-to-date and accurately reflect hiring and termination dates. Payroll data should be consistent with employment agreements and company policies.

Payroll policies must align with labor regulations, which differ across states and countries. Regular audits demonstrate compliance with regulatory authorities, reducing the risk of fines and penalties.

A well-structured payroll schedule ensures employees receive their wages timely and accurate manner, contributing to a positive workplace environment. Typical payroll frequencies include weekly, biweekly, semi-monthly, and monthly.

Before making any payroll modifications, such as salary increases or employment terminations, a documented request from either the employee or employer be in place.

Review benefit deductions to ensure accurate withholding and proper remittance for health insurance, retirement contributions, and other voluntary benefits.

Verify that employer contributions are correctly allocated, ensuring health insurance providers receive timely payments and retirement funds are deposited into employees' accounts, as required.

Confirm that court-ordered garnishments, including child support and tax levies, are accurately processed and updated based on legal requirements.

Ensure recorded hours align with timesheets and payroll amounts, particularly for hourly employees, to prevent discrepancies

Confirm that time-off is accurately categorized (like vacation and sick leave) and overtime pay is properly calculated and applied.

Identify potential payroll fraud, such as unauthorized time edits or "buddy punching," by verifying consistency between timekeeping and payroll records.

Ensure payroll registers contain correct details on employee pay, overtime, deductions, and taxes. Proper organization of these records helps streamline audits and quickly identify discrepancies.

Verify that each pay stub, whether digital or printed, provides a clear breakdown of wages, hours worked, overtime, and all deductions, ensuring transparency for employees.

Document all payroll corrections in an audit report and share it with key personnel, such as HR and Finance heads, to maintain accountability and compliance.

Ensure all employees receive at least the federal minimum wage of $7.25 per hour (effective since July 24, 2009) or applicable state/local minimum wages.

Verify that non-exempt employees are paid overtime at 1.5 times their regular rate for hours worked beyond 40 per week, as required by the Fair Labor Standards Act (FLSA).

Confirm employees are correctly classified to avoid non-compliance. Non-exempt employees must receive at least the minimum wage and overtime pay. Misclassification can lead to legal and financial penalties, including back pay for up to three years.

Ensure that payroll data is accessible only to authorized personnel by implementing strict access controls and monitoring system activity.

Encrypt payroll information to protect against unauthorized access. Regularly update encryption methods to align with evolving security standards.

Conduct periodic access audits to ensure former employees and role-changed personnel no longer have access to payroll systems, reducing security risks.

Review bank activity to ensure payroll transactions align with payroll records. Verify proper documentation for all direct deposit changes.

Cross-check payroll records against the general ledger to ensure consistency and accuracy in financial reporting.

Track YTD payroll expenses to assess budget allocation, identify spending patterns, and detect potential discrepancies.

Thoroughly document payroll modifications to prevent discrepancies and demonstrate compliance during audits.

Compile a comprehensive payroll audit report and implement process improvements, such as upgrading payroll software, strengthening internal controls, and/or revising payroll policies.

Ensure payroll systems maintain a detailed audit trail, allowing transactions to be traced back to their source for accuracy and fraud prevention.

Analyze recurring issues such as employee misclassification, inaccurate wage calculations, or delayed tax payments. Addressing these proactively reduces the risk of penalties and enhances audit efficiency.

Invest in payroll software to automate data entry and verification, minimizing human errors and ensuring consistency in payroll records.

Use audit findings to implement process enhancements, such as refining payroll policies, optimizing internal controls, and updating software solutions to prevent recurring issues.

Assess payroll needs, including employee classifications, pay schedules, and compliance requirements.

Review setup procedures, including employee profiles, tax information, and pay cycles. Conduct parallel payroll runs when transitioning systems to identify discrepancies.

Identify critical payroll staff and their roles to ensure accurate and timely processing of payroll.

Ensure accurate classification of employees to comply with labor laws and payroll requirements. Different contracts may include unique compensation terms, benefits, and tax obligations.

Regularly cross-check payroll lists with HR records to verify that all listed employees are actively working.

Ensure payroll records reflect correct hire and termination dates. Remove inactive employees promptly to prevent unauthorized payments.

Verify that all tax withholdings (federal, state, and local) are accurate and properly remitted, covering income tax, Social Security, and Medicare.

Ensure non-exempt employees receive applicable wage structures (like minimum wage) as mandated by the Fair Labor Standards Act (FLSA).

Properly distinguish between full-time employees, temporary workers, and independent contractors to avoid misclassification penalties.

Ensure payroll records—including employee pay, overtime, deductions, and taxes—are accurate and well-organized to streamline audits and quickly identify errors.

Verify that each employee’s pay rate matches their contract and is updated accordingly when raises or salary adjustments occur.

Ensure all payroll calculations, including gross pay, net pay, and deductions, are accurate and properly processed.

Cross-check timesheets with payroll records to ensure employees are paid for hours worked.

Ensure that overtime pay and PTO accruals are correctly calculated and recorded.

Detect potential payroll fraud, such as buddy punching or unauthorized time edits, by matching attendance logs with payroll data.

Ensure payroll transactions align with bank statements to identify discrepancies.

Compare payroll records with the company’s general ledger to verify consistency.

Confirm that all direct deposit payments and manual checks are properly documented and authorized.

Examine payroll records to identify any manual adjustments made to employee salaries, deductions, or benefits. Ensure that all changes were properly authorized by management and supported by valid documentation. Unauthorized modifications can lead to financial discrepancies and compliance risks.

Analyze payroll records to confirm that any errors from previous payroll cycles were accurately corrected. Common mistakes include miscalculated wages, incorrect tax deductions, or overpayments. Ensuring these corrections are properly documented helps maintain compliance and prevents financial loss.

Verify if any retroactive salary adjustments, bonuses, or deductions were applied correctly. Retroactive payments often occur due to late promotions, payroll processing errors, or contract revisions. Confirm that such payments align with company policies and legal requirements to prevent disputes or miscalculations.

Conduct thorough audits to ensure that every individual receiving a paycheck is a legitimate employee. Ghost employees (fictitious or former employees still on the payroll) can lead to significant financial fraud. Look for irregularities such as duplicate names, mismatched employee records, or payments issued to unverified individuals. Regular cross-check with HR records and attendance logs would help prevent such fraud.

Analyze payroll records for suspicious patterns, such as sudden salary increases, repeated manual adjustments, or frequent changes in employee classifications. Payroll fraud may include falsifying work hours, unauthorized raises, or misclassifying employees to manipulate tax or benefits obligations. Implement strong internal controls and regular monitoring to detect and prevent fraudulent activities.

Ensure that payroll responsibilities are distributed among multiple individuals to minimize fraud risk. No single employee should have complete control over payroll processing, approval, and disbursement. Assign different roles for data entry, approval, and payment authorization. Implement periodic role rotations and independent audits to maintain transparency and accountability.

Evaluate payroll software and security settings to identify any potential weaknesses or unauthorized access points. Restrict system access to authorized HR, finance, and payroll personnel only. Implement multi-factor authentication (MFA) and regular access reviews to enhance security.

Ensure that payroll data, including employee salaries, tax information, and banking details, is encrypted and securely stored. Even in the event of a data breach, encrypted information remains protected against unauthorized access. Regularly update encryption protocols to align with industry best practices and regulatory standards.

Maintain a step-by-step record of all payroll transactions, including modifications, approvals, and payments. A detailed audit trail helps trace financial activities back to their source, making it easier to detect errors, fraud, or unauthorized changes. A well-documented audit trail enhances compliance, ensures accountability, and simplifies payroll audits.

Checking YTD payroll helps businesses see how much they’ve spent on employee wages so far. It also helps them track which departments have the highest payroll costs and if they can afford to hire more staff. Reviewing YTD totals also makes it easier to find and fix any mistakes early.

Businesses must make sure payroll taxes are paid on time every quarter and at the end of the year. Filing reports late or making errors can lead to penalties, so it’s important to check that all tax documents are correct and submitted by the deadline.

Employees in the U.S. must complete a W-4 form so the right amount of taxes is taken from their paychecks. Employers need to give W-2 forms to employees and 1099 forms to contractors, so they have accurate records of their earnings and tax deductions.

Every industry has rules about payroll. Companies need to follow these rules to avoid fines or legal trouble. Regularly checking for updates in industry regulations can help keep payroll processes in line with the law.

If the government requires audits or has certain payroll rules, businesses must follow them. Ensuring compliance before an official audit can prevent penalties and make the process smoother.

Keeping detailed records of payroll transactions helps prevent errors and disputes. Every paycheck, tax payment, and deduction should be recorded so there’s a clear history of all payroll activities.

Payroll records must be stored for a legally required period. Companies should ensure records are kept in a secure location and in a way that meets legal standards for data protection.

After an audit, a full report should be created to show what was reviewed, any problems found, and suggestions for improvement. This can help prevent payroll mistakes in the future and ensure payroll processes run smoothly.