Usually carried out by a business owner or trusted employee, an outside accounting firm could also carry out a payroll audit. Behavioral control, financial control, and the worker-company relationship differentiate independent contractors from employees. For example, independent contractors generally work on their own schedules and use their own equipment to complete their jobs. Employees are bound to the employer’s set working hours and expect to be given all the equipment needed for work. It’s not only sinister, but it’s more ubiquitous in small businesses than you might think. A 2020 report by the Association of Certified Fraud Examiners (ACFE) found that payroll fraud cases are two times more prevalent in small businesses than in large enterprises.

Employers should report instances of payroll fraud to the state attorney general’s office or the FBI. If an employee discovers payroll fraud, they should immediately report it to a trusted manager. The sooner the fraud is reported, the smaller the damage will be to the company. You should already be double-checking your payroll system user permissions and converting cash and checks to direct deposits or pay cards where possible to more easily track payments.

Worker misclassification

The Michigan Attorney General has determined that a full and complete investigation of what happened within the Catholic Church is required. This investigation is and will continue to be independent, thorough, transparent, and prompt. My department and this investigation will find out who knew what, and when.

• This type of payroll fraud is most often committed by a human resources employee or someone with easy access to the company payroll system.
• It can also be carried out by employees who make false claims for payment and by employers who classify full-time employees as independent contractors to avoid paying payroll taxes and insurance.
• Fraud of this nature would result in a criminal charge of embezzlement as well as a violation of state laws relating to wages and fringe benefits.
• While that’s usually the case, fraudulent behavior can occur within a company as well.
• MP’s payroll management experts outline the seven best practices for preventing and addressing every type of payroll fraud.

Payroll fraud is typically conducted by a human resources staff or someone with simple access to the company payroll system. The culprit may create a fictitious employee or continue to pay a staff member who no longer works for the organization. They can collect the ghost employee’s paycheck as if it were their own by faking employment documents.

Employee Misclassification Fraud

Finally, all timesheets should be reviewed and signed off by managers before they are processed for payroll to ensure that all of the entries are legitimate. While technology has made payroll fraud easier in some ways, technology may also be used to prevent fraud. The ACFE’s 2024 Anti-Fraud Technology Benchmarking Report revealed that the use of AI and machine learning for fraud detection is expected to nearly triple over the next two years. It can’t come soon enough as 83% of organizations reported they’re counting on implementing AI solutions in the next two years. A Michigan operator of an insurance agency stole payroll deductions earmarked for IRA contributions.

If an employee or employer commits payroll fraud, they can open themselves up to a lawsuit . The party that’s been victimized can often sue to recover the money that was stolen from them. These types of cases are often subject to state labor laws, so contact a local lawyer if you’re considering a payroll fraud lawsuit. Some employees may receive bonuses or commissions when they make sales or hit milestones. These bonuses act as an incentive for employees to work hard and excel at their jobs.

Advance Payment Fraud

These are just a few of the warning signs to watch out for—remember, payroll fraud can take many forms. That’s why you should review your company’s payroll and accounting records on a regular basis. With QuickBooks Payroll, all of your payroll information is in one place, making it easy to review records and look for irregularities.

• This type of payroll fraud can be carried out by individuals in the payroll department – signing over the false paycheck to their own bank account.
• It’s often committed by an employee that (either accidentally or intentionally) fails to pay back an advance payment.
• For teams to identify payroll fraud and root it out, it’s crucial that teams know what to look for.
• Businesses that pay staff hourly are more susceptible to timesheet payroll fraud, as employees have greater incentive to inflate their hours (and their compensation).
• If you are looking to outsource Paychex can help you manage HR, payroll, benefits, and more from our industry leading all-in-one solution.