Preparing for a Payroll Audit

by ShelbyW on September 23, 2012

  • SumoMe

Payroll audits are typically performed by a third-party and can be conducted for a number of different reasons. You may be audited to confirm that all of your business payroll information is accurate, you may be audited when deductions do not match contributions, and you can also be audited to ensure that you are complying with Federal laws.

Companies that handle their own payroll never want to receive audits in the mail and when they do, they fear that they have made errors the prior year that may cost thousands. If you have never been audited in the past, you might not be sure what to expect or how you should prepare for the inspection of your records. Read on and find out what you will need so that you can enter the process prepared.

What is Verified

Compliance payroll auditing is conducted to verify that your company is following a very strict set of guidelines. Because of this, all audits are similar and all of the same records will be checked. Here is a payroll auditing checklist for you to review so that you know what to expect:

  • Verify all of the active employees working for the company.
  • Verify current and past pay rates.
  • Verify the hours paid and payroll journals.
  • Review the Payroll Reports to the General Ledger to verify it is accurate.
  • Audit the Payroll Tax Submissions for the period being audited.
  • Audit the Bank Reconciliation for errors.

How to Prepare

To help you prepare for your audit, you can request to be sent a pre-audit questionnaire that will help you gather all of the documents and reports you need to provide to the auditor. In most cases, a pre-audit questionnaire will be mailed to the employer or emailed if an email address is on file. The pre-audit questionnaire includes some very straightforward but useful rules relating to payroll and can make the process of auditing the company’s payroll much faster. Here are some of the questions you will need to answer prior to the date of your audit:

  • Is payroll prepared in-house or by an outside payroll services contractor?
  • Has the same system been used for the entire audit period?
  • Is payroll organized into different departments?
  • When do contributions begin for new hires?
  • Are all work hours reported?
  • What types of hours are reported?
  • Are vacation hours reported?
  • Are holiday hours reported?
  • Who prepares your contribution reports?
  • Have you used 1099’s during the audit period?


If you failed to pay the correct payroll taxes, the fines and penalties can be severe. Employers who are charged with failing to deposit their withheld payroll taxes or intentionally using those funds for other purposes can face both civil and criminal actions. If withheld payroll taxes were used for anything other than paying taxes, even if there was no bad intention, you could face criminal charges in addition to stiff civil penalties of 100% of the delinquent taxes.

As an employer, it is vital that all payroll tax rules are followed exactly with no mistakes or you can face significant penalties and consequences. If you want to prevent all of this from happening again in the future, you may want to consider hiring a professional payroll service that knows all of the laws and will ensure that you comply with these laws in the future. Failing to comply with the strict payroll laws can cost you a pretty penny and may even land you in jail. Ensure your entire payroll is reported accurately and you will save money and time.

Shelby Warden is a researcher and a contributing writer for, a payroll services company located in Canada. They provide a variety of payroll services and have been trusted by companies from coast-to-coast for over 40 years. Contact PAYweb to handle your payroll services so you have one less thing to worry about, you can rest assured that they are up to date on all tax rules and regulations.




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