What Is Payroll Risk Management? An Ultimate Guide To Understanding Payroll Risks

8
Min
What Is Payroll Risk Management? An Ultimate Guide To Understanding Payroll Risks
Written by
Mayank Bhutoria,
Co-Founder
July 3, 2024

Key Takeaways

  • Payroll risk management encompasses measures that eliminate payroll threats and ensure employees are paid properly, adhering to compliance requirements.
  • Common risks in payroll management include payroll errors and inaccuracies, fraudulent activities, compliance with legal regulations, and data breaches.
  • Payroll tax management risks can be eliminated by implementing effective audit controls, staying updated on tax regulations, employing reliable global payroll softwares, etc. 

In every business, payroll management is one of the most critical processes as it revolves around ensuring that employees are paid correctly and on time. But when working with remote teams and globally distributed teams, managing payroll poses several challenges: compliance issues, delayed payments, payroll inaccuracies, and frauds. This article details the concept of payroll risk management, the common risks, and how they can be mitigated to enhance operational efficiency, and employee satisfaction.

What is Payroll Risk Management?

Payroll risk management involves identifying, assessing, and mitigating risks such as human errors, fraud, non-compliance issues, data breaches without compromising accuracy, and timely compensation. 

To sum it all up, its primary goals include:

  • Ensuring higher accuracy in payroll processing by minimizing errors in payroll calculations.
  • Maintaining compliance with regulatory policies and federal laws that govern payroll operations.
  • Mitigating payroll frauds to eliminate financial losses and build trust among employees.
  • Preventing data breaches and unauthorized access to confidential information such as payroll data, the personal and financial details of employees with robust security protocols.

Common Risks in Payroll Management

Now that we’ve explored what Payroll risk management is and its objectives, let us now dive into the common risks present in payroll management.

Payroll errors and inaccuracies

Correct and timely pay are day-to-day expectations employees usually have working in an organization. However, there can be several errors or miscalculations in payroll that need to be avoided. Some of these errors include:

  • Miscalculation of pay: When employees are paid in varying frequencies (weekly or monthly), payroll professionals may err by missing out on processing an employee’s first paycheck, overpaying or underpaying them, and deducting the wrong amount for benefits. These will lead to disgruntled employees, financial setbacks for the company, and even potential lawsuits. To solve this problem, payroll softwares with automation capabilities can be implemented as they automate complex and repetitive payroll processes, ensure compliance with local labor and tax laws, and eliminate miscalculation or other errors that are caused by manual methods. 
  • Failure to report all taxable compensation: In an employee’s salary structure, taxable earnings include equity compensation, bonus awards, private medical insurance, and rewards such as gift cards, travel awards, etc. While they may not seem like compensation, they are still considered as part of the payroll. Hence, not reporting these can result in tax filing penalties and impact employees as well.
  • Poor data entry: Data entry mistakes such as incorrect logging of time and attendance and mismatching employees to social security numbers can happen, which directly result in delayed payroll processing, possible compliance violations, and internal misunderstandings within the company. Manual data entry causes 40% of payroll errors. A good payroll management software with data management and record-keeping capabilities can streamline data entry without committing any mistakes. 
  • Outdated software issues: A sound payroll system reduces non-compliance risks and human errors. Which is why it is essential to frequently update payroll softwares to keep up with changing labor laws and practices. Upgrading to new systems that implement the latest technologies is highly recommended to avoid such problems. 

Payroll fraudulent activity

Payroll frauds happen when an individual deliberately manipulates the calculation of an employee’s compensation. This form of theft can massively impact a company’s financials. There are various types of payroll frauds, some of which are:

  • Ghost Employees: Ghost employees are non-existent or fictitious employees that are created and added into the payroll system. Payments for these entities are illegally siphoned into the accounts of other employees. This can happen in large scale organizations with hundreds to thousands of employees that have weak internal controls.
  • Timesheet Fraud: Here, employees falsify their timesheets to include extra hours that they’ve never worked. Employees do this to misappropriate overtime allowances. Unauthorized changes to payroll records: In this scenario, an employee's grades or hourly rates are altered to qualify them for higher payment than what they are entitled to. This fraud is common among employees that have personal connections with the HR and payroll departments. This can lead to both financial and legal repercussions for the company and proper internal controls have to be put in place to prevent this. 
  • Buddy Punching: Here, an employee arranges for their colleague to punch in their horse, while the former takes the day off. While this may not have serious financial implications for the company, it reflects negatively on the employee’s integrity and code of conduct. Termination threats and biometric time clocks can be implemented in this scenario. 

Compliance with legal and tax regulations 

Payroll compliance stands as one of the main pillars of effective payroll management that keeps company finances at an equilibrium. Organizations have to abide by all the rules and regulations set that govern the compensation employees get and non-compliance to such regulations will impact the company’s finances, goodwill, and long-term sustainability in this dynamic landscape where commerce meets legislation. 

The slew of labor laws, state regulations, and statutory requirements are just a minor speck of the legal framework, as adherence to them is mandatory, and not a choice. Even then, organizations still face certain compliance issues such as frequent revisions as well as operating in multiple locations with different tax regulations that can impact the payroll process. Regardless of the complexities, organizations are still mandated to adhere to such regulations. Otherwise, they’ll incur hefty fines and legal complications due to non-compliance.

A few strategies that can be effective in this regard include:

  • Being updated about regulatory changes and taking actions accordingly.
  • Conducting frequent compliance audits.
  • Investing in HR and payroll management software with in-built compliance features that can maintain accurate records, track and update tax policies within the system, and streamline tax compliance for a hassle-free payroll process.

Security risks and data breaches

Payroll information is usually sensitive data such as personal information of employees, bank account data, KYC documents, and other legal or tax documents. Data breaches could result in data leaks that can put employees at risk of identity theft or financial fraud. Unauthorized access to payroll information can also lead to frauds in altering payroll details.

A few tips that can be followed to prevent such risks include:

  • Implementation of robust security measures such as data encryption and multi-factor authentication.
  • Conducting regular security audits and closing all backdoors within the system to avoid breaches. 
  • Training employees on best security practices so they will be better prepared for such threats and be able to protect themselves.

How to Reduce Payroll Tax Management Risks

When it comes to payroll risk management, it is better to be safe than sorry. Here are some tips that can be followed to reduce payroll risks:

Using a reliable global payroll software 

These softwares leverage automation tools to minimize human errors and reduce the manual work required to manage payroll taxes. Additionally, they can adapt to new tax laws and regulations, even while operating in multiple locations, and ensure compliance requirements are met to eliminate the risk of fines or legal issues otherwise. 

Staying informed on tax legislation updates

Doing this not only helps a business keep up with changing tax laws, but they can also adapt to them and alter payroll processes accordingly. The key to managing payroll tax risks is to be on top of the legislative requirements and in doing so, they will be positioned as a reliable and trustworthy employer. 

Regularly conduct compliance audits

Consistent compliance audits are essential to ensure adherence to tax laws. It starts with reviewing the payroll procedures, verifying employment data and payments, and cross-checking with the general ledger to identify errors in payments. 

Ensure accurate employee classification

Separating employees from independent contractors is crucial as provisions and laws for both parties are different. Hence, double-checking and using proper tools to classify them will prevent any risk of penalties or financial implications.

Maintain proper records

Businesses should keep accurate records of income generated from operations and prioritize saving all invoices for every expense incurred. This helps prevent overpaying payroll taxes or inaccurate filing of tax reports.

Training and educating employees

Employees are prone to making mistakes and they need to be updated with the latest trends in tax legislation and technology. Educating them on new laws, tax calculation, and data protection will help them independently handle record-keeping and compliance issues. 

Implement effective audit controls 

To control access to data, it’s essential to appoint an independent auditor to periodically scan through the books. Access to employee information and any changes to be made must be password-protected and tracked at all times. And to streamline payroll processes, separate individuals can be appointed to prepare, authorize, and run all checks. 

Case Studies: Payroll Management Success Stories

Here’s a case study highlighting the success story of Sketchnote, one of our esteemed clients that provides a project management software designed to enhance efficiency of small businesses. The platform simplifies task management and automates workflows, ensuring smooth flow of operations. 

The challenge

Sketchnote has teams distributed across multiple countries with offices in India, Pakistan, Spain, and Silicon Valley. Its team members work remotely and before implementing Gloroots, they paid their contractors one by one, which reduced the productivity of team members and took focus away from building their product.

The solution

Sketchnote made only one payment to Gloroots every month for payroll and the latter focused on making payments to all contractors in their local currencies. This reduced the administrative burdens for Sketchnote as Gloroots handled communications with contractors. Contractors could also upload invoices, amend contracts, and check payment statuses directly on Gloroots’ contractor platform.

Result

  • The time spent on payroll fell by 87% thanks to elimination of manual checking of invoices, conversion to different currencies, and international wire transfers. 
  • Sketchnote was able to make 15 separate payments in just one transaction without incurring multiple international transfer fees.
  • They also used Gloroots’ contract templates and were already compliant with the laws of operating countries, thus no longer required to spend on legal fees. 
  • Sketchnote could also view all invoices, payment statuses, and contracts conveniently through Gloroots’ Employer Dashboard. 

Wrapping Up

Now that we’ve explored in-depth the concept of payroll risk management, some of the common challenges present in it, and steps to reduce payroll tax management risk, implementing the right measures to maintain payroll standards is critical to ensure that your company is protected from financial losses and legal issues. 

By employing Gloroots, you can seamlessly manage global payroll and prevent the risks that are present in payroll management. Our personalized demo will give you comprehensive insights on how Gloroots can benefit your organization’s payroll processes and you can take control of your finances and ensure that your employees are satisfied.

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