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What is payroll fraud?

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Payroll fraud is when an individual unlawfully changes a payroll system to alter employee compensation. Both employees and employers can commit payroll fraud.
Employees can commit payroll fraud by recording hours they didn’t work or by increasing their compensation. Employers can commit payroll fraud if they unlawfully withhold wages and benefits that are meant for employees.

What are a few common types of payroll fraud?

There are several kinds of payroll fraud. Below are a few common types:

  • Misclassification
    Employers classify employees based on criteria such as the worker’s relationship with the company, benefits workers are entitled to, how the worker is compensated, and other factors. Employers may misclassify employees to save money on unemployment taxes, payroll taxes, and employee benefits. Intentional misclassification qualifies as payroll fraud, which can result in legal fallout for the employer.
  • Timesheet fraud
    Timesheet fraud is when employees change their timesheet to reflect more working hours than they actually put in. Employees can either record hours they didn’t work or access the payroll system and increase their hourly pay rate by adding overtime.
  • Commission schemes
    Some businesses reward employees with bonuses or commissions when they hit sales milestones. To commit payroll fraud, employees can give themselves commissions or bonuses they didn’t earn.
  • Workers’ compensation fraud
    Workers’ compensation fraud occurs when an employee fakes an injury during working hours or falsely claims they got injured at work in order to collect workers’ compensation. Workers’ compensation can cost insurance companies a lot of money, causing them to raise their premiums and charge businesses more for insurance coverage.
  • Ghost payroll
    Ghost payroll is when companies pay employees who don’t exist. Anyone with access to the company payroll system can commit this fraud. An individual can create a fake employee or keep a staff member on payroll who left the company in order to collect the ghost employee’s paycheck for themselves.
  • Third-party scams
    Payroll can also be committed by external parties who target individual employees or company records. Cybercriminals can target HR employees and trick them into granting access to sensitive information such as employees’ Social Security numbers and income. Cyber criminals can then file fake tax returns or divert employee paychecks into their own accounts.

How can companies detect payroll fraud?

It’s not always easy to detect payroll fraud, but employers should watch out for a few probable signs:

  • Errors or gaps in payroll records
  • Changes in payroll records that weren’t made by HR or payroll team members
  • Employees who have identical addresses or bank account details
  • Unauthorized emails about payrolls

For more information read our guide for payroll fraud

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