How to Protect Your Business from Payroll Fraud Schemes

Payroll fraud is a threat to any business that pays employees or contractors. Unfortunately, this type of financial crime can go undetected for months — even years — and inflict significant losses.

Findings from Recent Study

The Association of Certified Fraud Examiners (ACFE) defines payroll schemes as, "A fraudulent disbursement scheme in which an employee causes their employer to issue a payment by making false claims for compensation." According to the ACFE's "Occupational Fraud 2024: A Report to the Nations," payroll fraud incidents generate a median loss of $50,000 (or $2,800 per month) and can take 18 months to detect.

In the study, some industries and geographic regions appeared more susceptible to these schemes than others. Although 10% of worldwide fraud cases in all sectors involved payroll, about 33% in the transportation and warehousing, retail, and technology sectors involved payroll. In the United States and Canada, 15% of fraud cases involved payroll.  

Like many forms of occupational fraud, the impact extends beyond direct financial losses. It can also affect employee morale, attract unwanted media attention and unsettle customers, possibly causing a loss of confidence. Furthermore, payroll fraud can lead to IRS and regulatory fines and penalties for violating tax and labor laws.

Types of Payroll Fraud Schemes

Although employees can commit payroll fraud, so can employers and third parties. Here's an overview of payroll schemes and recommendations for preventing them:

Fraud Prevention Tips

As with most forms of fraud, preventing payroll fraud requires multiple layers of internal controls. Here are some recommendations to fortify your company's defenses:

Also educate employees about payroll schemes, phishing attacks and the importance of not sharing sensitive information via email. The 2024 ACFE study found that the median fraud loss for victim-organizations that provided fraud training to executives, managers and employees was roughly half the median loss reported by organizations without training programs.

Universal Threat

Payroll fraud can pose a threat to businesses of all sizes and industries. Your organization can mitigate the risk by understanding the various forms of payroll fraud and implementing robust internal controls, frequent audits and employee training. Contact Porte Brown for assistance.

Some Ghosts Are Employers

"Ghost employer" is the term given to employers that issue Forms W-2 to their employees but don't submit those forms to the Social Security Administration. These employers also fail to file employment tax forms or make federal tax deposits, thus widening the IRS's tax gap (which is the difference between tax owed and tax paid).

To help reduce the tax gap associated with ghost employers, the Treasury Inspector General for Tax Administration (TIGTA) recently evaluated IRS data — called the Ghost Employer Project — that included results from 2018 to May 2023. TIGTA's analysis estimated that 162,000 potential ghost employers owe $1.7 billion. TIGTA noted that successfully prosecuted cases have led to average restitution of $1.3 million per case.

We Help You Get to Your Next Level™

Get in touch today and find out how we can help you meet your objectives.

Call Us