Red flags auditors look for when reviewing payroll procedures

When the State Unemployment Department* audits you, auditors are looking mostly for misclassification, specifically employee and contractor misclassification.

Auditors want unemployment taxes. The Federal Government (who funds them) prefers to have taxes withheld at the source – meaning by the business owner.

When taxes are withheld at the source, the proper reporting of that income is much higher than if it is not withheld at the source.

If it is the Department of Labor (Federal DOL) auditing, it is likely that someone filed a Fair Labor Standards Act (FLSA) complaint about overtime. Auditors are looking to see if you have classified employees as exempt or non-exempt properly and paid overtime that was due.

If it is the Internal Revenue Service (IRS) in a tax audit, it is to ensure that the income was actually paid out. And, not a scam to hide income from reporting. On rare occasions, there may be an “Employment Tax Audit” by the IRS but they are very rare.

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*Each state has its own name for this department.

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