Payroll fraud in small businesses is far more common than you might think. According to the Association of Certified Fraud Examiners, 30 percent of all payroll fraud cases take place in companies with fewer than 100 employees. What makes this situation even more challenging is that it takes an average of three full years for small businesses to catch on to the fraud and for the perpetrator to face consequences. It’s crucial that small business owners train their staff to recognize and report common schemes to stop payroll fraud before it financially destroys the organization.

Most Common Types of Payroll Fraud Schemes

Payroll fraud can range from simple acts committed by one person to elaborate schemes orchestrated and carried out by a team of people. They don’t even need to be in the same location to be part of a payroll fraud ring. Some of the most common schemes to be aware of include:

Falsifying Hours or Commission

As one of the most basic types of payroll fraud, employees who commit this type record more hours than they actually worked or turn in paperwork that shows they’re entitled to more commission on a sale than they really are.

Ghost Employees

A ghost employee is a fake worker set up by another employee. When the non-existent employee receives a paycheck, it funnels to the employee who established the ghost account. Fortunately, this situation is much easier to catch in a small company as opposed to a large corporation.

Not Paying Back a Salary Advance or Overpayment

It’s more common in small companies to issue a salary advance to employees who ask for it by claiming a financial emergency. Some businesses also set up payroll to cover hours not yet worked. Not reimbursing these amounts is payroll fraud.

Padding Expenses

Companies that reimburse employee expenses may find workers exaggerating the amounts to receive higher reimbursement.

Withholding Taxes and Not Remitting Them

Employees in the payroll department may withhold taxes from the paychecks of other employees and then pocket the money instead of remitting it to the proper taxing authority.

How to Safeguard Your Small Business Against All Types of Payroll Fraud

Conducting frequent internal audits allows you to get a big picture of money coming in and money leaving the organization. The person conducting the audit shouldn’t hesitate to ask about any gaps not logically explained by other paperwork.

Establishing a system of checks and balances is critical in fighting payroll fraud. That means not trusting a single employee to run all payroll functions. Employees should rotate between accounting, payroll, and onboarding of new employees to determine if discrepancies only arise when a certain person completes each function.

Instructing your employees on how to report payroll fraud and setting up a separate bank account strictly for payroll can help prevent you from becoming a victim as well.

Have additional questions about payroll fraud or other business topics? Schedule an appointment with Capital Business Strategies today.