Criminal proceedings were almost three times more likely than civil litigation to find in favor of the business vs the employee. If you have payroll software, ask about tools that can automate this tedious process. Some will allow you to upload documentation of the expense so that you have backup handy when you decide to do a thorough review. In addition to understanding what payroll fraud is, it’s important to know what the most common forms of payroll fraud are so you can be on the lookout. Of course, some companies already do not allow such types of requests to be made via email.

  • This payroll fraud is typically committed by someone in human resources who has easy access to the organization’s payroll system.
  • You especially need to pay attention if you only have one employee who handles payroll at your small business.
  • In its simplest form, an employee over-reports his hours worked with the intent of receiving more pay than was earned.
  • Workers’ compensation fraud occurs when an employee fabricates an injury or falsely claims to have been hurt on the job to collect workers’ compensation.

Payroll fraud schemes are among the most damaging to a company because they tend to take place over a long period of time. According to the Association of Fraud Examiners the median duration between the start of a payroll fraud scheme and its detection is 24 months — enough time to do some significant financial damage to a company. And some experts estimate that almost a quarter of businesses are affected by payroll fraud each year.

Supervisory reviews and the threat of termination are the best ways to avoid this risk. A more expensive alternative is to use biometric time clocks, which uniquely identify each person who is signing into the time keeping system. Monitoring your payments on a regular basis will not only help you detect payroll fraud, but stop it from happening altogether. But even if you don’t have the time or patience to do this yourself, there’s no reason to let this slip – because you still have the option to hire an external auditor. But if you’re just looking to learn how to stop it from happening to your business, read on. This type of payroll fraud is usually a double act, involving collusion between an employee and a member of your payroll staff.

Safeguards To Prevent It

These modes of payroll fraud can be as straightforward as picking up the paycheck of a fellow absent employee, or simply not paying back an advance. Whether you’re looking for a tool with user authentication or expense reimbursement features, you can find what you need in our payroll software directory. You can filter products in our directory by functionality, price, or business size, and you can also read reviews from real users. In all of its various forms, time theft is a common form of payroll fraud. Below, we’ll look at five common types of payroll fraud and detail ways that you can use software and policy in tandem to prevent it from taking place in your small or midsize business . Payroll fraud can take many different forms and have varying degrees of severity.

  • The tools and resources you need to run your business successfully.
  • At ADP, security is integral to our products, our business processes and our infrastructure.
  • When you are enrolled in EFTPS, the IRS will automatically send you an EFTPS Inquiry Pin so you can monitor tax deposits.

These types of cases are often subject to state labor laws, so contact a local lawyer if you’re considering a payroll fraud lawsuit. Employees collude with the payroll clerk to increase the amount of their hourly pay in the payroll system. A more clever clerk will then return the pay rate to its original level after committing this fraud for just a few pay periods, so that the issue is less easy to spot. This can be detected by matching pay rate authorization documents to the payroll register. In small businesses, it can be easy to make one person responsible for running several functions.

Tips to fight payroll fraud

For instance, IRS’ Employer’s Supplemental Tax Guide for worker classification guidelines severely penalizes workers for misclassification. Today’s digital landscape means limitless possibilities, and also complex security risks and threats. At ADP, security is integral to our products, our business processes and our infrastructure. ADP is a better way to work for you and your employees, so everyone can reach their full potential. Overtime charged for employees who normally would not have overtime wages.

Also, as technology improves, cybercriminals are carrying out extremely sophisticated payroll frauds that can be difficult to identify. The financial implications can be devastating if it continues for a long time. The perpetrators of this type of payroll fraud create fake staff in the payroll system or do not remove the staff any longer employed with the company. In terms of fraud prevention, auditing is probably the wisest step an employer can take.


When a worker is clearly spending more than they earn, this may be a warning sign of workplace fraud. The additional monetary loss to the organization is in the form of penalties from the regulatory authorities for failing to adhere to payroll compliance requirements. The tools and resources you need to take your business to the next level. The tools and resources you need to run your business successfully. The tools and resources you need to get your new business idea off the ground.

Understand staff classification

During National Fraud Week, the third week of November, EisnerAmper takes a look at several types of common business-related fraud and offers preventative tips. Keep a separate copy of your PIN and password for the Electronic Federal Tax Payment System . When you are enrolled in EFTPS, the IRS will automatically send you an EFTPS Inquiry Pin so you can monitor tax deposits.

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We’re here to help you get organised, and and get your finances, team, and business premises up and rolling. Leveraging the right software in tandem with best practice protocols can set you on the right path, helping you avoid long-term damage and even prevent fraud from happening in the first place. A formal quarterly payroll audit can help you catch any fake accounts and prevent long-term damage. A well-known and often-cited case of falsifying wages was uncovered at the Indianapolis Bond Bank, where two employees stole nearly $400,000 in unauthorized pay and benefits over nine years. You want to let workers clock in and out of shifts themselves to not only give them a sense of autonomy, but to also take an enormous administrative burden off management. Check and payment tampering are four times as likely to occur in small businesses than large businesses.

Payroll and Taxes

People who compute pay rates and accumulated hours for payroll should not be allowed to write payroll checks or submit the hours for payment by a payroll service without supervisory approval. An internal audit is a common way small businesses can catch payroll schemes. An internal audit is when someone working within your company checks your business’s finances, operations, or management. You can conduct internal audits at random times to catch employees off guard.

Don’t allow retained earnings department employees to generate their own paychecks. Run payroll for them or rotate responsibilities within a department. When companies pay nonexistent staff unwittingly, it is termed ghost payroll. This payroll fraud is typically committed by someone in human resources who has easy access to the organization’s payroll system. When employees misclassify their status in the payroll system, they steal the benefits they are not entitled to.

Billing fraud — a bird’s-eye view

Modern payroll software has built-in features to detect any anomalous activity related to payroll records. Furthermore, payroll automation is the best way to identify any irregularities sooner and save monetary loss to the business. Some employees may receive bonuses or commissions attached to their sales targets.

Sometimes, employers misclassify workers willingly to save costs like unemployment taxes, staff benefits, and payroll taxes. Payroll fraud occurs when an individual illicitly changes the company’s payroll system to manipulate the calculation of employee compensation to their own benefit. When an employee asks for an advance payment and doesn’t pay it back, the employee has committed payroll fraud. If the accounting department charges this advance to “expenses,” nonpayment of the advance often goes unnoticed. In this payroll fraud, either employees’ grades are altered, or their hourly rates are changed to qualify them for a higher payment than they are entitled to. This fraud happens due to the collaboration of employees with the human resources and payroll departments.

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Padding hours to timesheets is among the most frequently occurring form of employee fraud. It’s often perpetrated in small amounts so as to not to make a supervisor suspicious. This practice can flourish in workplace settings where managers neglect to closely monitor timesheets. With strong anti-fraud measures in place, you’ll be better equipped to spot employee payroll fraud and help minimize financial losses for your business.

It’s also essential to segregate duties within your accounting or payroll department. One person should be responsible for preparing the payroll and another for verifying and submitting payments. Review your payroll each pay period and during quarterly reconciliations. Also, perform unscheduled audits to help deter misconduct, and take time to review your company’s payroll audit trail. You can source the services of a reputable payroll service provider to help you mitigate the risk of payroll fraud.

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Throughout her career, Heather has worked to help hundreds of small business owners in managing many aspects of their business, from bookkeeping to accounting to HR. Before joining Fit Small Business, Heather was the Payroll/HRS Manager for a top cloud accounting firm in the industry. Her experience has allowed her to learn first hand what the payroll needs are for small business owners.

The solution will ensure only authenticated employees are paid and identify any anomalies in payroll processing. Association of Certified Fraud Examiners, payroll fraud schemes last for an average of 24 months. If you suspect payroll fraud within your organization or need help safeguarding against it, please call one of our professionals.

instances of payroll

These imposters can make the correspondence look very believable by using company logos, signatures and email addresses. You should also be aware that many scammers try to set up entire payroll systems in your company’s name by using ghost employees. One of the easiest ways to ensure a strong and reliable payroll process is by using a payroll software that allows you to manage your employees, payments, and taxes all in one place.

They may even have the opportunity to pay themselves bonuses when none are warranted. By falsifying their wages, employees have the opportunity to pilfer from an organization and personally profit. Though they’re more prevalent in massive organizations where people can more easily get lost in the fold, ghost employees can pop up in SMBs as well. In 2019, a former Metropolitan Transportation Authority employee was found to have collected nearly $250,000 via paychecks after his termination in 2013. When using internal controls to prevent fraud, first assess resources to assure you have enough employees to achieve separation of duties.

Some staff may receive bonuses or commissions when sales or milestones are met. These bonuses serve as an incentive for employees to work hard and perform well. Employees may occasionally find out how to pay themselves commissions or bonuses they did not earn. This is referred to as a commission scheme and is usually penalized as payroll fraud. The longer payroll fraud happens, the more costly it is for the business—and most often, businesses do not get back their losses. By understanding the types of payroll fraud and applying procedures to prevent them, you can reduce your chances of becoming a victim.