Payroll Briefs

7 Common Payroll Risks for Small to Mid-Sized Businesses

May 30, 2024

When reviewing your business operations, sometimes the areas running smoothly can be overlooked. Don’t become complacent. This can threaten the smooth functioning of payroll processes, potentially leading to costly errors, legal issues and compromising the trust of your employees.  

To help safeguard against these risks, our payroll pros recommend conducting an annual payroll audit to ensure payroll continues to run smoothly. Below we outline seven common payroll risks your business should be aware of.  

  1. Inaccurate Recordkeeping – If you are not keeping detailed and accurate records, this could become a much larger issue down the road. For example, the Fair Labor Standards Act (FLSA) requires businesses to maintain records of employees’ earnings for at least three years. Violations of the FLSA can trigger severe penalties. Be sure you and your staff know what records to keep and have sound policies and procedures in place for keeping them. 
  2. Employee Misclassification – As more companies utilize independent contractors within their operations, the potential of misclassifying their employees as contractors becomes a larger risk, which can lead to significant tax liabilities and legal consequences. Violating the applicable rules can leave you owing back taxes and penalties, plus you may have to restore expensive fringe benefits. 
  3. Manual Processes – As a small to mid-sized business, you may still have some manual steps to your payroll process to record or input critical data. With the possibility of human error, this is an area of your business worth automating. By working with a payroll provider, you can leverage software to automate, take advantage of integrations with other HR management systems and manage your tax administration.  
  4. Privacy Violations – Payroll data contains sensitive information such as Social Security numbers, bank account details and salary information. Inadequate data security measures can expose businesses to the risk of data breaches, identity theft and financial fraud. Make sure you implement strict access controls, encryption protocols and regular security audits to safeguard payroll data from unauthorized access or cyberattacks. 
  5. Internal Fraud – Unfortunately, internal fraud can hit businesses in a few different ways, including employees “cheating” on their time sheets or embezzlement. You can protect against internal fraud by establishing a segregation of duties, confirming your payroll personnel have a clean track record with a background check and implementing a robust time and attendance system. Also, by conducting an annual audit you can detect any anomalies or discrepancies.  
  6. Tax and Legal Compliance – Keeping up with constantly changing federal, state and local employment laws and tax regulations is a daunting task. Failure to comply with these laws can result in penalties, fines and legal liabilities. To mitigate this risk, you can partner with a payroll provider familiar with the reporting requirements. Most of the time they can take on the burden of accurately calculating and depositing your payroll taxes.  
  7. Disaster Preparedness – Depending on how you manage your payroll, there are external threats like system failures, power outages and business fires that could impact your ability to process payroll. Make sure you have a backup of your payroll data to mitigate the impact of unforeseen events on payroll processing.  

We’re Here to Help  

Don’t leave your payroll processing open to these common risks. By partnering with our payroll pros, you will have the tools to defend against these risks and keep your payroll running smoothly. Our user-friendly software allows you to automate, integrate and stay in compliance. Contact us today to learn more.