As aprofessional, what’s your job? According to Lisa Poole, CPP, corporate for Simmons Bedding Corp., your job is to protect the company’s assets, protect employees’ data and remain compliant.
Internalhelp you do all three. Poole and Rosemarie Fraumeni, CPP, payroll manager for American Dental Partners, Inc., led a workshop on payroll self-auditing techniques at the American Payroll Association’s Annual Congress in May.
Know thy payroll
IRS auditors generally don’t look at your entire payroll. Instead, they sample it. You need to sample, too, Poole said.
Sampling is more efficient than testing 100% of the population, Fraumeni added, but she specified two situations where you should never sample: when you have small populations (fewer than 200 to 300 employees) and when you have large dollar amounts, including negative deductions or taxes or refunds of overwithheld FICA taxes.
A department or class of employees (e.g., exempt or nonexempt) can be your sample, Poole noted, but whatever your sample, it should be objective. Best practice: Ask someone outside the Payroll department to define your sample, but set parameters for that person, Fraumeni advised.
Once you have your population, you must set the sample period. An effective self-audit looks at one complete cycle, Poole said. A cycle can be one payroll, or a monthly, quarterly or annual period. You must also define your sampling unit—e.g., dollars or hours. Finally, you must consider how the error rate will be measured. And you have some choices, here, too, said Poole—percentage of pays, percentage of gross dollars or percentage of net dollars.
Items to audit
Self-audits usually rely on time records, the payroll register and wage and tax registers, general ledger balances, W-2 forms and theclearing account. Fraumeni suggested that self-audits cover these items:
- Employees’ Social Security numbers and data changes
- Forms I-9
- Tax deposits as measured against Forms 941
- Unclaimed wages
- Tax rates and state reciprocity rules
- Quarterly reconciliations
- Checks to inactive employees (e.g., severance pay or bonuses).
Poole also emphasized that you should data-scrub your files periodically. What to look for: data exceptions, such as W-4s and state withholding compliance, cost center changes (i.e., is your data going to the correct cost center?) and pay/deduction code changes.