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Payroll Audits And Penalties

How To Handle Payroll Audits And Avoid Payroll Penalties

Why Do A Payroll Audit?

A payroll audit can occur for many reasons: someone from the government comes calling because you may have done something wrong; an employee makes a claim of unfair pay practices, or; you simply decide to review your own procedures, either internally or by using and independent third party such as an accountant.

Generally speaking, the processing of payroll can produce errors in several places, which calls for a detailed process flow that also incorporates several controls. This procedure can be used to ensure that payroll is handled consistently on a repetitive basis.

Every payroll professional knows that they must ensure that all employees are paid accurately, that contracts and wage and hour laws are adhered to, and that each paycheck is taxed properly.

However, with all of the documents that payroll professionals need to keep track of, it is easy to miss something. Forms like EIN, TIN, Employee addresses and SSN, I-9, W-4, and DOL records - as well as the numerous requirements and reporting timeframes - can overwhelm even the most seasoned payroll pro.

Bottom line, payroll audits are good in that they can help fix problems before they are discovered by the government, can help re-assign tasks as needed, and can help determine if an outside source by used to provide payroll services.

What Are The Most Common Types Of Payroll Penalties

The most common types of payroll penalties include:
  • Improperly classifying workers. This includes 'exempt' v 'non-exempt' and 'independent contractor' v 'employee'
  • Miscalculating overtime wages
  • Paying the wrong tax rates
  • Filing late
These are all easys things to fix. Find out how with our 'Payroll Penalties: How To Avoid Or Get Them Waived' course!

For Training On How To Handle Payroll Audits & Penalties

Don't get audited - or penalized! Click the applicable link below to order one of our training courses on proper documentation, identifying and avoiding payroll problems, and getting penalties waived if you do get fined!

Featured Course: Payroll Penalties: How To Avoid Or Get Them Waived

We all know that penalties can be costly and annoying - especially if they are for an inadvertent mistake. But did you know that some of these penalties can be appealed or waived with a show of good cause?

This training session will arm you with all you need to know in order to submit a penalty waiver request - and hopefully receive the waiver!

During this 90-minute audio conference, you will learn about typical penalties that are associated with employees - and how to avoid them - as well as what you can do to get them waived!
    avoiding payroll audits and penalties
  • Most common types of penalties
  • How they are assessed
  • How to read the penalty notice
  • What amounts can be assessed
  • Steps for getting penalties waived
  • Penalty abatement techniques, including what to focus on in order to insure that your waiver request is complete and timely
More Details / Order:
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More About Payroll Audits And Penalties

Reasons Why I Need To Do A Payroll Audit

The following are the main reasons why you should do a payroll audit:
  • Verify employee vs independent contractor designations (By far the most common reason for a payroll tax audit is when a business classifies workers as independent contractors, but whom the IRS believes they may need to be classified as employees)
  • Prevent payroll fraud by weeding out ghost employees or mismarked time cards
  • Catch manual errors made when entering numbers into a system
  • Spot calculation mistakes if doing payroll by hand
  • Realize you need to factor in a raise
  • Remove terminated employees from your payroll
  • Verify your tax withholdings are accurate
  • Accurately account for paid or unpaid time off
  • Compare hours paid to when employees clocked in
  • Ensure you are compliant with employment laws
What Happens If I Lose A Payroll Audit?

If you lose the audit, your business may need to pay penalties and interest, in addition to the employment taxes you did not pay when misclassifying workers. It is worth noting that these penalties can be has high as 25 percent of the total amount of the missed tax payments.

Employers who hire workers as independent contractors must be sure they can justify this classification through such documents as written contracts and verifying the workers' independence with a checklist or other criteria. These are the kinds of back-up an auditor will look for in a payroll audit.

A press release from the State of California's Department of Industrial Relations (DIR) in February, 2019 carried this headline:
"Labor Commissioner's Office Cites RDV Construction $12 Million For Wage Theft Affecting More Than 1,000 Workers"
While this is not necessarily a typical fine, it does illustrate the potential severity of the financial burden that can come from payroll non-compliance, intentional or otherwise. So don't let your organization get an audit or fine; take our training courses today to help you understand your compliance requirements!

What Are The Most Common Payroll Penalty Amounts

The IRS calculates payroll penalties by the day. Late penalties are:
  • 2% for deposits fewer than six days late
  • 5% for deposits made six to 15 days late
  • 10% for deposits made 16 or more days late
If the IRS decides your failure to pay your payroll taxes is tax evasion, you may face criminal penalties. Tax evasion penalties include a maximum fine of $500,000 and up to five years in prison





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