Staffing situations can change quickly and significantly for small businesses. In any calendar year, your clients will likely need to hire, fire, promote, and demote employees. All of these actions result in changes to pay rates, wages, and tax withholdings. It’s easy to lose track of so many intricate modifications.
CPA firms looking to bolster their Client Advisor Services (CAS) service offerings may want to consider adding internal payroll audits to your list. They can be conducted any time of year so they’re great for off-season work, and they rely on the skillsets accountants are known for, attention to detail and critical thinking.
Companies should consider conducting quarterly audits as a proactive strategy to identify and avoid payroll errors in the future.
What is An Internal Payroll Audit?
An internal payroll audit is a self-initiated analysis of a company’s payroll process. The internal payroll audit reviews whether or not the process functions properly.
Internal audits are an extremely powerful business tool for identifying areas for improvement. No regulatory body is reviewing the results so even if a client performs poorly, there is no formal consequence. Performing an internal payroll audit can help companies to significantly lower the risk for surprises if an IRS auditor comes knocking.
An internal payroll audit reviews all aspects of a company’s payroll process, including:
- All Active Employees
- Pay Rates
- Wages and Paid Time Off
- Tax Withholdings
Identifying Clients In Need
Advisors don’t expect business owners to remember any given employee’s ID number or pay rate off the top of their head–but if a client can’t readily find their EIN or SUI login, there's cause for concern.
It’s no secret that your small business clients are busy: but it’s a compliance risk for all parties if you’re constantly chasing them for critical account information.
If you’re frequently hearing phrases like these, it may be time for a check-up:
- “We hired somebody new?”
- “I don’t know what my payroll company does, but they get everybody paid.”
- “The SS-4 letter is somewhere…I can find it for next time?”
To conduct an internal payroll audit, you and your client will need to gather statements and reports.
If you process payroll for your client, you need to provide these documents from your client’s payroll account:
- 941s, 940s, W3s, copies of W2s, I9s, W4s (if applicable), copies of Visas, copies of work permits.
- Unemployment records
- COVID unemployment records (if applicable)
For clients that outsource payroll, provide them with a copy of the list above to ensure they can request the proper documents from the provider. Advanced payroll providers like ConnectPay have client portals where small business owners can log in and print payroll reports by themselves. Authorized CPAs and TPAs also have access to client accounts and reports.
Conducting the Audit
Use the following steps to start your client’s internal payroll audit.
- Review records for all employees listed on your client’s payroll.
For each employee: verify duration of employment, pay rate, and any withholdings. If an employee is currently receiving or has received benefit claims, like disability or unemployment, provide those records as well. Verify that each employee has a username and password for all reporting agencies. Are there employees working remotely in other states? Is your client compliant with nexus regulations?
- Verify Time Off is Marked Correctly.
Make sure that paid time off is marked correctly in your client’s time tracking software and matches the data in your payroll reports. Vacation time and sick time must also be recorded accurately in the payroll system and in your gross expenses.
- Crunch the Numbers.
Now that you’ve verified payroll information for your client’s employees, it's time to compare that information against the payroll reports. Take a look at each employee to make sure they’ve been paid correctly. Does the payroll report data match the data in your client’s time tracking software? Verify that pay rate, hours worked, and employee records are identical. Note discrepancies.
- Analyzing Payroll Records and Identifying Discrepancies.
Payroll reports must be analyzed alongside gross payroll expenses. Point out any discrepancies against your general ledger and any bank statements. Verify your client’s employment taxes by comparing the payroll report to the client’s 941.
- Making Adjustments.
Once you’ve run the audit, work with your client to prepare a summary. Identify areas for growth and potential errors. If a client is doing a stellar job with compliance, recognize that success. Identifying strengths of the company as well as the weaknesses can boost morale and may inspire some business owners to make improvements.
A Preventative Measure
Internal payroll audits aren’t mandatory, but they are helpful to clients and advisors. Internal payroll audits give clients the chance to identify and possibly prevent challenges ahead of an IRS audit. Advisors benefit from obtaining a full scope of the client’s company and data.
Firms around the country are conducting internal payroll audits for clients as a paid service. ConnectPay works with CPAs to provide the reports advisors need to audit successfully. Have questions? Let’s Connect to get you the answers you need in just one phone call.