What Are Payroll Internal Controls?

Payroll involves a lot of sensitive and personal employee information. It is important for employers to keep that information safe. You also need to prevent payroll fraud. You need to limit who has access to payroll information and who can make changes to your small business payroll.

Do you know how to maintain payroll confidentiality?

What are payroll internal controls?

Payroll internal controls are the procedures your business follows to protect its payroll information.

Payroll controls and procedures prevent employees from accessing confidential information. Internal controls also prevent employees from stealing money from your business through overpayments and false time records.

In large businesses, payroll internal controls involve dividing payroll tasks among departments and employees. Dividing tasks ensures many people have their eyes on the payroll process, meaning someone has less ability to commit fraud.

With your small business, dividing payroll tasks is probably not practical. But, there are still things you can do to create internal controls for payroll processing.

How to implement payroll internal controls in your small business

Because you will probably handle payroll yourself, many internal controls that large businesses use will not work for your business. Here is a payroll controls checklist for the payroll internal controls that your small business can do.

Limit access to payroll records

Only the person who runs payroll for your business should have access to payroll records and processes. As the business owner, you will most likely be the person who will run payroll. However, you could have a trusted manager or hired payroll specialist run payroll.

Inspect payroll records

You should regularly inspect your business’s payroll records to make sure everything is accurate. Inspecting payroll records is a good monthly task. If you check payroll records each month, problems will not go unnoticed for long periods of time.

Regularly checking your business’s payroll records is crucial if you are not the person running payroll. You should trust the person running payroll, but you should also make sure that they do not make any mistakes. The person running payroll could also betray your trust. If they do, it’s better to find out as soon as possible.

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Create a separate bank account

Create a bank account dedicated to payroll. Every time you process payroll or pay payroll taxes, the money should come out of this dedicated account.

If an employee is able to commit payroll fraud or gains the information to your payroll bank account, you won’t lose all your business’s money. The payroll bank account should only ever have enough funds to complete payroll. The rest of your money should be protected in a separate bank account for business.

Have time cards approved twice

To make sure a time card is correct, you and the employee should both approve the time card. The employee’s approval says they checked the time card before submitting it to you. Your approval allows you to make sure the employee is not manipulating their hours.

If you use Patriot’s online time and attendance software, the employee and you both must check an approval box on the employee’s time card. You can only send the time card to payroll after you both approve the hours worked.

Get your records audited

Have someone periodically audit your payroll records. The audit makes sure you are running your payroll correctly. The audit also helps make sure you are paying the right amounts to your employees and tax agencies.

Use security measures

You should lock up your payroll records so unauthorized people cannot access them. Your electronic records should be protected behind a strong password. If you have paper records, they should be locked up somewhere, such as a filing cabinet.

Familiarize yourself with trends

You should know approximately how much you spend on payroll each pay period. If you have a pay period that greatly fluctuates from your average payroll spend, you should investigate it. There might be an error in the calculations, or someone might have manipulated the payroll.

Use Patriot’s online payroll software as part of your payroll internal controls. We protect your payroll information with secure servers, firewalls, and encryption. And we guarantee accurate calculations, meaning you don’t need to worry about making mathematical errors. Get a free trial now!

This article has been updated from its original publication date of August 10, 2016.

This is not intended as legal advice; for more information, please click here.

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