Combating the High Incident of Payroll Errors

January 24, 2023
Managing and administering payroll is a complex process that requires accuracy

Managing and administering payroll is a complex process that requires accuracy, thoroughness and an understanding of regulations governing payroll processes. According to Deloitte’s recent Global Payroll Benchmarking Survey, topping the list for areas requiring improvement in payroll processes are compliance (81%) and accuracy (70%). Beyond these problem areas, the Department of Labor (DOL) reports that the number one reason why multi-employer plans fail a DOL investigation is that they simply do not conduct routine payroll audits.

To combat these problems and better ensure high quality payroll processes, regular payroll audits are essential. It is important to note, that not all payroll audits are alike. In fact, there are many variations in how payroll audits are performed. In addition to payroll audits conducted by internal staff, audits may be completed by a third-party. The latter is actually preferable, at least periodically, as a check and balance procedure where complex payrolls exist such as with multi-employer plans. Regardless of who performs the payroll audit, there are essential components that should be included.

Components of a Payroll Audit

All payroll audits must be conducted on a “regular” schedule depending on how complex an organization’s payroll is (e.g., based on types of employees – full and/or part time, independent contractors, union or non-union, etc.). Every payroll auditor must carefully review each employee’s name, title, start date and salary/pay rate. The latter, in particular, should be carefully examined as changes in an individual’s role may also have an effect on his/her pay rate. Other variables include number of days and/or hours worked depending on the individual’s position. There should be consistency between an organization’s list of employees on payroll and their employment records. Also to be considered is pay and variable pay (i.e., commissions, bonuses, overtime, profit sharing, etc.) and whether or not an employee or employees have been given raises or if there has been a change in the way they are being paid.  For instance, if an employee has transitioned from hourly wage status to a salaried position resulting from a promotion. Tax withholdings and deductions must also be a focus during the payroll audit to ensure the correct amount of federal, state and local tax is being withheld, along with the proper Social Security deduction.

The Hallmarks of the Best Quality Payroll Audits

Given the many variables involved, it is easy to understand why errors can be made by payroll professionals conducting audits. There are, however, some payroll professionals who go above and beyond when handling payroll audits. For example, when conducting a payroll audit for a multi-employer plan, the best third-party administrators of payroll auditing services follow these strict procedures:

  • Obtain and review copies of collective bargaining agreements and the plan’s governing documents to ascertain the method of contributions
  • Obtain all payroll records from contributing employers
  • Perform the payroll audit, either in-house or onsite at the employers’ facility, reviewing each year’s records and each member for which contributions were made
  • Determine if a plan has complete and accurate data for each participant and if the plan is receiving the proper employer contributions
  • Help plan trustees demonstrate their due diligence in seeking an independent, third-party review of employer contributions, recording findings and improving the accuracy of contributions

For single organizations and multi-employer plans, making high quality payroll audits a top priority will support both compliance requirements, as well as maintaining positive relations between employees and Management.