Secret Ways Employees Participate in Payroll Fraud

Payroll fraud affects about 30 percent of business annually, these businesses lose millions of money not including the cost of investigating potential payroll fraud.

There are three types of payroll fraud: Timesheet fraud, ghost employees, and worker misclassification.

Timesheet fraud, paying employees incorrectly or overpaying employees based on falsified timesheets.

There are a few ways this can happen…an employee forgetting to clock in and having to manually enter their hours allowing them to add extra hours that they did not work or changing their pay rate. Timesheet fraud can be caught by regular audits, reviewing employee schedules, and strict employee policies regarding timesheet submissions and changes.

Buddy Punching

One employee punching in for a friend who is running late or punching out late for a buddy that left work early is very common.  An electronic clock that uses a swipe card or a key fob can go a long way to preventing this problem and Timesheet fraud mentioned above.  For major problems a finger print reader can be installed.

Ghost employees.

Fake employees created by a payroll clerk, or an employee who no longer works for the company but was never taken off the payroll. The payroll clerk creates a ‘new’ employee with a same first and last name, but a similar or shortened middle name and diverts money to themselves by using the new employee or the existing employee who no longer works for the company. Example : Lauren Elizabeth Jones cuts a check to Lauren Beth Jones. The person who processes payroll should not be the same person who is allowed to make changes to employee records.

Worker misclassification.

Payroll fraud perpetrated by the company itself by a misunderstanding of the IRS rules or intentionally. The IRS requires employers to classify their employees by independent workers (1099 Employees) or W-2 employees depending on the type of work. The company chooses to classify workers by 1099 employees to avoid paying payroll taxes, benefits or insurance premiums which is illegal. The highest fine given can be as much as $25,000 per instance plus the paying back the payroll taxes and penalties.

Even if employees are ordered to pay back restitution, the losses can be horrendous for the company. Regular audits and comparing your payroll registers to checks that have been cut or deposited to locate duplicate names, social security numbers, and addresses or employees who no longer work for the company can help save your business from fraud. These three types of fraud can be costly to your business, regular audits will help eliminate those unwanted costs.

For a payroll audit or for more information regarding timesheet automation, please call Malcolm or Scott today at 800-451-1136.

Written by:

Scott Evers

Scott Evers

Chief Distribution Officer

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