Payroll fraud: What Is the Penalty for Payroll Fraud?

Payroll fraud: What Is the Penalty for Payroll Fraud?

Payroll fraud

Payroll fraud can result not only in criminal charges but also in the loss of a job or career. As a result, it is vital to defend against any claims or charges of this form of fraud. If you have been suspected of payroll fraud, consult with a fraud lawyer.

In severe fraud cases, employees might commit payroll check fraud by creating ghost employees. Ghost employees are fake workers on the payroll who don’t work for the company. Generally, ghost employee cases are rare and easy to catch in small businesses. Employees can commit payroll fraud by clocking hours they don’t work or secretly increasing their compensation rate. On the other hand, employers can commit payroll fraud by withholding wages and benefits that they owe their employees. In either case, one party is being deceitful and stealing from the other to enrich themselves.

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If you suspect payroll fraud within your organization or need help safeguarding against it, please call one of our professionals. – James Marasco, CPA, CIA, CFE James I. Marasco, CPA/CFF, CFE, CIA Jim is a partner at EFPR Group. He brings more than 18 years of public accounting and auditing experience. He is a full-time management consultant and travels extensively throughout the country while leading StoneBridge Business Partners (an EFPR Group affiliate company).

Payroll fraud

Additionally, they might face other payroll fraud punishments, such as having to make repayments to the IRS. An employee arranges with his fellow employees to have them punch his hours into the company time clock while he takes the day off, which is known as buddy punching. Supervisory reviews and the threat of termination are the best ways to avoid this risk.


This is when an employee files a false workers’ comp claim, which may involve faking an on-the-job injury or claiming they were hurt at work when they were actually injured at home. This directly affects workers’ compensation insurers, but businesses pay the price in the form of higher premiums. This happens when someone in HR or the payroll department adds a fictitious employee (or keeps someone on the payroll after they’ve left the company). Payments are sent to the account or address of this ghost employee and collected by the scammer or an accomplice.

  • If businesses aren’t diligent, the toll of this deception and theft can be considerable.
  • Read on to learn more about the causes of payroll fraud and how it’s detected, or use the links below to navigate the post.
  • They tamper with documents to make checks appear to be made out to the ghost employee, but they pocket the money for themselves.
  • By falsifying employment records, they can collect the ghost employee’s paycheck as if it were their own.
  • Obviously, no business owner intentionally hires employees with fraudulent behavior.

If a payroll fraud scheme is taking place, it’s usually uncovered at some point or another. However, some forms of payroll fraud can be very difficult to identify, meaning they can go on for a long time. In fact, according to the Association of Certified Fraud Examiners, payroll fraud schemes last for an average of 24 months. Workers’ compensation fraud is when an employee fakes an injury or falsely claims they got injured at work to collect workers’ compensation. Alternatively, this type of fraud can cost an insurance company a lot of money, which in turn can prompt them to raise their premiums.

Pay rate alterations

As a business owner, you might not be able to see every detail that goes on in your business. But employees are most likely in a better position to spot payroll fraud red flags. On average, instances of payroll fraud last approximately 36 months, wreaking complete havoc on the organization. The longer fraudulent activity continues, the more financial fallout it causes for the business. With strong anti-fraud measures in place, you’ll be better equipped to spot employee payroll fraud and help minimize financial losses (and headaches) for your business.

This is not intended as legal advice; for more information, please click here. Establishing a special phone number for tips and a clear procedure for reporting suspected fraud is a good investment in fraud protection. Employees who report suspicious behavior may mitigate losses more quickly than if the fraud goes on undetected for years. Employees can easily claim they had more expenses than they actually did if you don’t require proof.

Workers’ Compensation How It’s Done

If a payroll fraud operation is operating, it is usually discovered at some time. However, some types of payroll fraud might be challenging to detect, which means they can continue undetected for a long time. When an employer hires a new employee, the employee is required by law to complete tax forms, which are subsequently incorporated into the employer’s payroll system.

Most candidates put their best foot forward during the hiring process, making it difficult to spot certain behaviors. But, you need to do your due diligence before you extend a job offer. If you pass along responsibilities to employees, you must ensure you don’t entrust everything to one employee. You should have different employees set up new hires, process payroll, and handle accounting duties. And, you should have more than one employee doing each task to make sure they are honest.

And hopefully, you will avoid future cases of payroll fraud or other types of small business fraud. Action by whistleblowers is a common and effective way that employers discover fraud in the workplace. The report found that 30% of small businesses detect fraud by receiving tips.