Payroll Fraud: How to Identify Fraud & Safeguard Your Company 

MAR 23, 2021 

You work hard for your money, and it's important to have safeguards for that revenue in place. Here are 5 steps you can take to identify and prevent payroll fraud in the workplace.

Running payroll efficiently is hard work. It’s complex, it’s time-consuming, and it’s imperative that payroll be done correctly.

Unfortunately, those challenges mean mistakes can be common. Even worse, it’s possible for those complexities to open businesses up to fraudulent activity. Payroll fraud is more common than many business owners may realize. Studies have shown that roughly one out of four businesses experiences it at some point, and it’s nearly twice as common among small businesses with less than 100 employees.


While those are certainly some frightening numbers, there are plenty of ways to protect your business against payroll fraud. But first, it’s important to know the basics and the various forms this could take.


What is Payroll Fraud?


Payroll fraud is a type of theft in which someone in a business — either employees or employers — manipulates the payroll operation to receive or withhold wages or taxes incorrectly.


There are many ways a business could be a victim of payroll fraud. Employees might engineer their timesheet to be paid for hours they didn’t truly work, or they might request reimbursements for expenses they never incurred. Employers might misclassify employees to avoid certain payroll taxes. No matter how it is carried out, as with any fraud, these thefts can be extremely costly to a business and affect not only the operations but the employees who work there.


Beyond the legal ramifications, those downstream effects are why it is extremely important for business owners to monitor their payroll risks and controls as they build and maintain their payroll operations.

How Can I Prevent Payroll Fraud?


Whichever form it takes, one of the biggest issues with payroll fraud is its tendency to be under the radar. Studies on fraudulent behavior show that payroll often accounts for the longest-lasting fraud schemes, lasting an average of 30 months.


Clearly, knowing how to prevent payroll fraud is extremely important for any business. Here are five steps to protecting your business.

Know How To Detect It


For those who can’t prevent payroll fraud altogether, it is still essential to limit the damage by catching it early. Understand the ways payroll fraud may be done, and some of the tell-tale signs that fraudulent actions are taking place.


Monitor Reports Before Sending Out Payroll


The best defense against payroll fraud is constant vigilance. For smaller businesses, it could be helpful to take another look at your payroll before signing any paychecks, ensuring that wages and timesheets match up with what you scheduled.

Audit Payroll Regularly


While it may not be possible or feasible to review the payroll every single pay period, there should be at least several in-depth reviews throughout the year. Auditing your own payroll could also provide the benefit of a more long-term view, which could result in you noticing a troubling trend here and there. Having internal checks and balances as well as an outside source to double check everything from data entry to tax payments is also a good idea.


Establish New Policies


Sometimes, setting a standard is a clear indication of your intent to thwart any wrongdoing. While you may not want to appear paranoid, it is certainly understandable to institute a zero-tolerance policy for theft or fraud of any kind. Mentioning payroll fraud in that policy could deter someone from trying, simply because they know you are aware of it.

Outsource Your Payroll


It can always help to get a fresh pair of eyes on your business operations. Payroll fraud often happens when those executing the theft know there is a blind spot. Not only could outsourcing your payroll allow there to be more tripwires, but it puts that operation into the hands of experienced professionals who can guide you through those processes. You can explore our payroll solutions to learn the variety of options available through outsourcing.

Whether attacking the issue yourself or relying on professionals, your business is in better shape when you are prepared and proactive.



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