3 Types of Payroll Fraud and How to Avoid Them

3 Types of Payroll Fraud and How to Avoid Them

Imagine being a successful small business owner and going for years thinking all is well in accounting and payroll. That is, until the IRS shows up at your door with threats to shut you down. It is only then that you realize you have been victimized by payroll fraud. You now find yourself in debt to the IRS and potentially facing lawsuits from disaffected employees.

Payroll fraud continues to be a very real problem around the world. We have mostly kept things under control in the U.S., but instances of payroll fraud still do occur here. There are three main types of payroll fraud, according to a Dallas-based BenefitMall:

  • Time and Attendance – Submitting fake time and attendance records allows the perpetrator to pocket money that does not belong to him or her. This sort of fraud can be perpetrated by payroll staff, non-payroll workers, or a combination of both.
  • Ghost Employees – A form of payroll fraud generally limited to payroll department employees involves setting up a ghost employee and then pocketing that employee’s weekly paychecks. This fraud is easier to perpetrate in larger companies where ghost employees can get lost in the numbers.
  • Pocketing Withholding – The third form of payroll fraud is pocketing monies withheld from employee paychecks for income taxes and FICA contributions. This is the most serious form of fraud in terms of the IRS, for obvious reasons.

Is your company at risk of any of the three primary forms of payroll fraud? If you have not taken any steps to prevent fraud, then yes. Keep reading to learn what you can do about it.

How to Avoid Payroll Fraud

Benefit Mall says there are a number of things companies can do to avoid being victimized by payroll fraud. For starters, transitioning to a modern and integrated time and attendance tracking system can eliminate fake time and attendance submissions. Employers can install digital time clocks that are activated by employee ID cards or use employee monitoring to track attendance based on computer activity.

Next, employers can put in place a system of separated duties. In other words, do not have a single payroll department staff member handle everything. Task one person with the responsibility of managing time and attendance data. Another staff member can handle data entry. The third can actually run payroll once all the other tasks have been done.

Next, consider a system of checks and balances. This is especially helpful in preventing payroll staff from pocketing withheld income tax and FICA contributions. An example of checks and balances would be giving the accounting department access to payroll accounts and requiring regular audits. It is very difficult for payroll staff to pocket withholding if the accounting department is regularly auditing tax accounts.

Outsource Payroll Entirely

A company looking for a comprehensive solution to payroll fraud can always outsource payroll to a third-party provider. Get payroll out of the office and you guarantee that none of your employees will have sufficient opportunity to commit payroll fraud. Outsourcing is not the perfect solution, but it is the best one out there.

A cloud-based payroll solution from a typical outsource provider relieves the employer of most payroll responsibilities. They are limited to only entering payroll data at the end of each pay period. And if an integrated time and attendance tracking solution is utilized, data entry is minimized. The payroll provider handles everything else.

Payroll fraud is a very real problem. Protecting your company is a matter of shoring up your business in order to limit the opportunities to perpetrate fraud.