3 types of payroll fraud that may give you headaches

As a small business owner, you work hard to meet customer expectations and to keep your employees happy. One way to accomplish both tasks is to stay on top of payroll. Still, accurately paying your employees may be more difficult than it sounds. 

According to some estimates, payroll fraud happens in more than 25% of businesses. Even worse, small businesses are about twice as likely to experience fraud in payroll than their larger counterparts. To keep fraud out of your organization, you should know how it typically manifests. Here are three common types of payroll fraud: 

1. Fictitious employees 

If you only have a few employees, you may know everyone you pay. As your organization grows, though, you must watch out for fictitious employees joining your payroll. These may be either employees who once worked for you and have since left or individuals who never had a job with your company. If your payroll administrator pays workers who do not exist, you have a problem. 

2. Misclassifying workers 

When you engage someone’s employment, you must classify him or her as either an employee or independent contractor. For an individual to be an independent contractor, though, he or she must meet certain criteria. If you misclassify employees to avoid paying payroll taxes, you may engage in payroll fraud. 

3. Timesheet discrepancies 

Finally, perhaps the most common form of payroll fraud involves timesheet discrepancies. For example, your employees may misstate the hours they work. Good supervision and regular payroll audits may help uncover this type of fraud. Also, encouraging a culture of honesty may help you prevent timesheet discrepancies from occurring. 

While you may uncover other types of payroll fraud in your small business, these three are common. By understanding how payroll fraud tends to occur, you can better strategize for keeping it out of your organization.

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