Three Common Types Of Payroll Fraud

No one wants to picture his or her employees stealing from them. But it happens. In the form of property theft and payroll fraud. Shockingly enough, payroll fraud affects about 30% of businesses in America annually. Understanding the three main types of payroll fraud could help detect, then deter it.

Employee Misclassification

Often talked about, employee misclassification is no joke. The perpetrator of this type of fraud is the company, rather than the employees. Sometimes it is intentional; other times, it is a mistake. The IRS mandates all employers classify workers as either employees or independent contractors. Employers do not have to pay payroll taxes for independent contractors, nor are they required to provide health insurance or other benefits. To intentionally misclassify a worker means avoiding these costly taxes, and pocketing more money.

Ghost Employees

Ghost employees are not spiritual beings haunting a company’s hall. They are fake employees created by a member of payroll to divert funds. The person who creates this phony employee takes these funds. They can also be former employees of the company who were terminated but never removed from the company’s payroll system. Ghost employees can be flushed out through regular payroll audits. Anomalies like duplicate names, addresses, Social Security numbers, and the names of former employees can suggest ghost employees. Separating payroll duties can help deter this as well. The person who updates employee records shouldn’t be the same person who processes payroll, if possible.

Timesheet Fraud

Paying employees incorrectly for the hours they worked is timesheet fraud. Employees falsify their timesheets to earn more money. Some employees ask coworkers to clock in and out for them when they aren’t scheduled to work. A typical scheme involves employees forgetting to punch in or out and changing the times to reflect a longer working day. In some rare cases, a member of payroll will override employee timesheets to increase the amount of pay. Regularly checking timesheets can reveal employees who are beating the system. Seeing an employee clocked in on a Saturday when the office is closed for the weekend is a red flag.

Any type of fraud - but especially payroll fraud - is costly to businesses. Regularly running audits to ensure workers are being paid what they earn can help prevent the unfortunate phenomenon from happening.

Have you experienced payroll fraud? Tell us on PayrollTalk.