Payroll Audit Checklist

Review each employee's FLSA classification to ensure duties tests and salary thresholds are met for exempt status.

Audit worker classifications to ensure independent contractors meet IRS and state criteria and are not misclassified.

Verify that federal, state, and local tax withholding elections on file match each employee's submitted W-4 or equivalent forms.

Confirm that each employee's current pay rate in the payroll system matches their most recent offer letter or raise documentation.

Ensure all new employees added during the audit period were set up with correct pay rates, deductions, and tax withholdings.

Verify that overtime pay is calculated correctly at the appropriate rate for all non-exempt employees across the audit period.

Confirm that all employees are paid at or above the applicable federal, state, and local minimum wage for their work location.

Audit timekeeping records to ensure employees received legally required meal and rest breaks as mandated by state law.

Confirm that the regular rate of pay includes all required components such as shift differentials, bonuses, and commissions.

Review the company's time rounding practices to ensure they comply with FLSA rounding rules and do not systematically undercount hours.

Verify that employees who reported to work but were sent home early received required reporting time pay under applicable state law.

Reconcile federal income tax deductions against employee W-4 elections and current IRS withholding tables for accuracy.

Confirm that state and local income taxes are withheld at the correct rates based on employee work and residence locations.

Verify that Social Security and Medicare taxes are calculated correctly and that wage bases and rates are properly applied.

Ensure all voluntary payroll deductions such as 401(k) contributions and insurance premiums have signed employee authorization forms.

Confirm that court-ordered garnishments, child support orders, and tax levies are calculated and remitted according to legal requirements.

Verify that pre-tax deductions for health insurance, HSA, and FSA contributions are applied correctly and within annual limits.

Trace several employee pay records from gross pay through all deductions to net pay to verify mathematical accuracy.

Compare total payroll disbursements on the payroll register against actual bank account withdrawals for each pay period.

Verify that direct deposit amounts match net pay calculations and that funds were transmitted to correct employee bank accounts.

Audit any off-cycle or manual payroll checks to ensure they were properly authorized, calculated, and recorded in the system.

Confirm that all voided checks are properly documented and that replacement checks were issued with correct amounts and authorizations.

Reconcile Form 941 quarterly filings against payroll records to ensure reported wages, tips, and tax amounts are correct.

Verify that federal and state payroll tax deposits were made on schedule according to applicable deposit frequency requirements.

Review a sample of W-2 forms to confirm that reported wages, taxes withheld, and benefit amounts match payroll records.

Verify that state unemployment tax returns were filed accurately and that the correct SUI rate was applied throughout the year.

Confirm that 1099-NEC forms were issued to all independent contractors who received payments exceeding the reporting threshold.

Audit Forms 1095-C for accuracy of employee coverage offers, months of coverage, and safe harbor codes used.

Audit user access permissions to the payroll system to ensure only authorized personnel can process, approve, or modify payroll.

Verify that payroll preparation, approval, and disbursement functions are handled by different individuals to prevent fraud.

Review system audit logs to confirm that all payroll data changes including rate modifications and deduction updates are tracked.

Ensure that payroll runs require proper management authorization before processing and that approval records are maintained.

Confirm that payroll data is regularly backed up and that disaster recovery procedures are tested and documented.