Put simply, payroll fraud is when a person embezzles money from a business’s payroll system. It can be hard to track because both employees and payroll providers have the opportunity to perpetuate it. Payroll fraud is not as prevalent as it once was; in a time when more and more businesses outsource payroll to trusted professionals, the window for fraud to occur is getting smaller and smaller. However, it can still happen to your business. This article will examine the common variants of payroll fraud — and how to avoid them.
Common TypesThere are a few types of employee-side payroll fraud that occur more frequently than others. These are:
Wage FalsificationWage falsification includes the dishonest manipulation or modification of timesheets or hours billed. The best way to avoid wage falsification is to implement more oversight, such as supervisor approval of timesheets.
Ghost EmployeesIn larger, more byzantine businesses, payroll departments with questionable motives may insert non-existing employees, or “ghost employees”, into the payroll structure in order to collect their wages. If you run a larger business with the potential to include ghost employees, you can safeguard yourself against fraud by regularly conducting audits of your payroll and requiring social security number confirmation of each employee.
Workers’ Comp FraudWorkers’ Compensation fraud is another employee-perpetrated payroll fraud that seeks to take advantage of the Workers’ Compensation system. Employees may fake injuries to collect claims, which can lead to skyrocketing insurance premiums for self-insured businesses. You can protect your business from Worker’s Comp fraud by installing cameras on worksites and standardizing injury reporting.
Choosing the Right Payroll Provider can Protect Your BusinessChoosing the right payroll provider can help your business avoid fraud and unpaid bills such as missed deposits for employment taxes. Employers need to understand their payroll and employment tax responsibilities and choose a trusted payroll service. There are a few options:
- A Certified Professional Employer Organisation (CPEO): These are solely responsible for paying their client’s employment taxes, filing returns, and making deposits and payments for the taxes reported related to payroll.
- Reporting Agent: These are payroll service providers that inform the IRS of its relationship with a client using specialized forms. Reporting agents must deposit a client’s taxes using the Electronic Federal Tax Payment System (EFTPS) and converse with the IRS on behalf of a client.