How to Mitigate Payroll Risk and Avoid Mistakes

Errors in the payroll process can cause huge issues ranging from monetary losses to a weakened company reputation.

According to the National Academies Press, “Up to a third of payroll mistakes are linked to distractions from avoidable interruptions”. If your payroll process isn’t perfect, you could be exposed to even greater risk.

In order to prevent errors, and mitigate payroll risk, identify where potential risks in the process may lie. Then, address what controls or procedural adjustments you can make to eliminate these risks.

Learn about how a different pay experience can boost productivity


Risk #1

Incorrect processing of payroll by mistake, or with intention

This could mean employees colluding with HR for personal gain, employees making unauthorized modifications to the payroll database, or inputting incorrect details during payroll (number of days worked and overtime, for instance). These are all risks when humans deal with payroll.

Some of this can be intentional, and some may be true mistakes. Still, it’s important to be aware of these risks when it comes to payroll processing.

Risk #2


According to the E&Y Fraud Risks in Recruitment and Payroll white paper, common miscalculations are:

  • Reimbursement claims made on the basis of improper bills
  • Improper verification of bills leading to excess payments
  • e-TDS filed with wrong Permanent Account Number (PAN) for multiple months for several employees
  • e-TDS filed with 1 PAN for more than one employee
  • Incorrect reporting of income details leading to excess tax paid 

Pinpointing where the miscalculation occurred can be a headache. Miscalculations also impact the bottom-line, especially if you end up overpaying or incur a penalty from the mistake.

Risk #3

Setting yourself up for penalties

Setting payroll at the wrong tax rate, mismanaging payroll related documents, missed deadlines – each of these are examples of minor errors that can lead to severe penalties. Lack of ability when it comes to keeping up with ever-changing government regulations can mean increased penalties, too. The IRS estimates that over 40 percent of small businesses in the United States pay penalties of over $800 per year … the result of late or incorrect filing and payments.

Risk #4

Lack of security

Payroll includes a lot of personally identifying information. Unfortunately, that means there will always be a risk of identity theft, embezzlement, or falsifying documents for personal gain. The most common risk for a company is to have one person responsible for payroll. This one person calculates reconciliation and payment, which is a significant amount of power – it also increases security risks.

Additionally, there is the question of how secure your digital infrastructure is. How safe and secure is payroll data on the company’s server or network? If sensitive payroll information is not secure, it may lead to loss in reputation, loss of competitive advantage, loss of revenue, or legal consequences.

Risk #5

Ignoring payroll patterns

Pay attention to payroll to reduce the risk of losing employees. Payroll can divulge important employee information like leave patterns or management issues. Payroll has the ability to uncover behavioral patterns that can be managed or addressed to boost business productivity. 

If you start to notice payroll patterns that show a particular employee is calling in frequently, you might have an employee who is unengaged. Rather than losing money on what seems to be inevitable employee turnover, start uncovering what is causing this behavior.

How to mitigate payroll and avoid mistakes

Many payroll risks require similar solutions:

Outsource payroll

Outsourcing payroll frees up internal resources, lessens the risk of IRS penalties and can provide increased security around sensitive documents. As an ancillary perk, outsourcing can help initiate other benefits for a company, like improving direct deposit enrollment, which is cost-effective and less susceptible to payroll errors.

Fraud risk assessment

It’s essential to proactively conduct fraud risk assessments of your payroll process. Without getting under the hood of your current process, risks will not be identified and proper mitigating cannot ensue.

Improve internal controls and policies

This can help companies detect instances of fraud, allow a platform for training, or if needed a channel for whistleblowing. This could include options like re-delegating authority. Are only the most qualified employees able to access sensitive information?

It’s also important to ensure quality of your new policies. Implementing adequate monitoring and oversight strategies is imperative.

Show awareness

Letting employees know you recognize payroll mistakes are possible, and providing solutions and warnings can help temper issues both accidental and fraudulent.

  • Conducting manual and online training for relevant employees
  • Putting up notices to warn candidates about such practices

Offer payroll incentives

Offering something to boost morale, like DailyPay, can help. We recently wrote a case study on the impacts of engagement ride-share company, Reliable Transportation, experienced after offering DailyPay.  In a nutshell, driver engagement and loyalty surged after implementing the technology. Continue reading to learn about their experience.

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