Back to Payroll Management

6 Best Practices for Payroll Internal Controls

Written by:

Edited by:

Reviewed by:
Daniel Eisner and Mark Stewart

Published on September 21, 2022

Updated on November 17, 2022

6 Best Practices for Payroll Internal Controls

6 Best Practices for Payroll Internal Controls

Running payroll is a key business process with a lot of moving parts. The data used to process payroll is considered high-risk, as it contains employees’ personal information and payroll bank account numbers. One of the ways a business owner can safeguard this information is by putting internal payroll controls in place.

Payroll internal controls are business processes that give you greater control by keeping payroll processing accurate and secure. There are several different types of controls, each of which serves to protect a particular portion of your payroll process. 

This guide will put you and your business on the right track when it comes to controls for your payroll system. 

The Importance of Internal Controls

Many companies have internal controls in place around payroll processing. With verification processes and password-protected files, they protect confidential payroll records from being accessed by unauthorized individuals. Internal controls help prevent wage theft, which is when an employee falsifies their timesheets to incur an overpayment. 

There are a variety of payroll internal controls you might implement. To determine which are right for you, you’ll want to spend some time thinking about your top data and security concerns. There is no one-size-fits-all approach to payroll controls, but it’s important to have the right ones in place to protect your business against security breaches. 

woman employee with internal control icons

Top Payroll Internal Controls

Now that you’re aware of how important payroll internal controls are, let’s take a look at some of the best practices to implement.

Automate Key Payroll Processes

Investing in the latest payroll accounting software or working with a third-party payroll service provider will automate your payroll processes. Manual calculations take up a considerable amount of time and are susceptible to human error. 

Many payroll software solutions also have electronic timekeeping capabilities and built-in approval functions. Automation isn’t just a huge time saver – it sharply reduces payroll errors.

Segregate Duties and Responsibilities

If you have an in-house accounting or human resources team, it’s important to divide payroll processing duties. This can cut down on errors and increase security by limiting access to key functions to specific individuals. 

An example would be having one employee process payroll and another responsible for reporting. If your business structure allows, you could have your HR team keep track of employee payroll records in a personnel file instead of leaving them with accounting.

Run Regular Change Reports

A change report is a report that shows you the differences between the latest payroll run and the previous one. This can help you catch errors and correct them before issuing payments. You can also check payroll change reports against approval processes for things like timesheets, pay increases, and incentive or bonus payouts.

Create Review and Approval Processes

Establishing formal review and approval processes helps prevent payroll accounting errors and fraudulent activity like wage theft. One of the most common payroll approval processes is for timesheets. 

A typical timesheet approval process will involve the employee, their supervisor, and the person responsible for running payroll. Sometimes there may be more people involved, depending on how your teams are structured. 

Keep Payroll in a Separate Bank Account

Having a dedicated payroll bank account keeps your employee wages and payroll taxes separate from your main business account. Doing so simplifies tax filings and makes it easier to track your payroll funds and catch potential banking errors. 

A separate payroll bank account also offers protection against fraud. Should someone gain access to your payroll bank account, the rest of your business finances are protected.

Implement Security Measures

In addition to approval processes, you’ll want to make sure your payroll processing functions are secured. This means storing your payroll records in password-protected files and locking paper files in a secure cabinet. Most payroll service providers have additional controls in place and will often require a business to assign a staffer as the authorized point of contact. This limits the number of people who have access to payroll records, reducing risk. 

Summary

When you implement the right payroll internal controls, you can rest easy knowing your payroll records and confidential information are secure. This also helps streamline your payroll procedures and reduces the risk of processing errors. 

Without the right measures in place, your business could be vulnerable to data breaches and wage theft. Implementing these controls takes a bit of time and effort, but it’s a smart way to secure your business for the future.