Payroll Audit

What is a payroll audit?

A payroll audit is a review of payroll records, processes, and compliance. Internal audits verify that wages, deductions, and taxes are calculated correctly and that proper documentation exists. External audits may come from the IRS, state agencies, or workers' compensation insurers. Audits examine whether you are classifying workers correctly, withholding properly, and paying required taxes on time.

What auditors examine

Classification of employees versus contractors. Proper withholding for federal, state, and local taxes. Timely deposits of withheld taxes and employer contributions. Accurate Forms W-2 and 1099. Compliance with wage and hour laws including overtime and minimum wage. Verification that new hire paperwork is complete. Consistency between payroll records and general ledger.

Preparing for a payroll audit

Maintain organized records accessible quickly. Keep timesheets, pay rate change documentation, and tax deposit receipts for at least four years. Reconcile payroll to your general ledger monthly. Document your classification decisions for any workers treated as contractors. Address known issues before an auditor finds them. Proactive compliance costs less than penalty remediation.