Payroll audit: free checklist and best practices

Running payroll isn't just about issuing paychecks. It's about ensuring accuracy, accountability, and compliance. That’s where payroll audits come in. By regularly reviewing your payroll records, you can catch errors before they become costly, maintain compliance with ever-changing labor and tax laws, and strengthen internal controls.

For HR managers and small business owners, a payroll audit is a powerful tool to verify that every employee is being paid correctly and that all pre-tax deductions and contributions are accurate. In this guide, we’ll walk you through everything you need to know: from understanding what a payroll audit is to following a step-by-step process, using a downloadable checklist, and applying best practices to streamline the process.

Whether you're conducting your first audit or refining your current process, this resource is designed to help you protect your business and keep your payroll process running smoothly.

What is a payroll audit?

A payroll audit is a detailed review of your company’s payroll processes to ensure all payments, withholdings, and records are accurate and compliant with employment laws. It involves cross-checking employee information, pay rates, hours worked, tax deductions, and benefits contributions against internal records and payroll reports.

This type of audit helps confirm that employees are being paid correctly and that your business is fulfilling its payroll tax obligations. It can also uncover inconsistencies like duplicate entries, misclassifications, or outdated employee data that could lead to compliance issues or financial loss.

Whether done internally by your HR or finance team, or externally by a third-party auditor, payroll audits are a proactive way to identify errors, reduce risk, and maintain trust with employees and regulators alike.

Types of payroll audits

Payroll audits typically fall into two main categories: internal and external. Both serve important roles in maintaining payroll accuracy and compliance, but they differ in scope and who conducts them.

• Internal audit: An internal payroll audit is performed by your own HR, finance, or operations team. It’s usually scheduled regularly, such as quarterly or annually, as part of your company’s internal controls. The goal is to identify and fix errors, ensure compliance with labor laws, and improve the efficiency of your payroll process before any issues escalate.
• External audit: An external audit is conducted by an outside party, such as a government agency or an independent auditor. These audits may be routine or triggered by specific concerns, like suspected misclassification of employees or tax discrepancies. External audits typically involve more scrutiny and are meant to ensure that your company is meeting all legal and regulatory obligations.

Understanding the difference between these two audit types can help you better prepare, regardless of whether you're initiating a review yourself or responding to one from a third party.

6 benefits of payroll audits

Regular audits are more than just a payroll compliance exercise. They’re a strategic tool that can improve your operations, protect your business, and build employee trust. Here are six key benefits of conducting routine payroll audits:

1. Enhance payroll compliance

Payroll laws and tax regulations are constantly evolving. Regular audits help ensure you're following federal, state, and local requirements, reducing the risk of penalties, back taxes, or costly legal disputes.

2. Avoid payroll errors

Payroll mistakes like incorrect pay rates, missed overtime pay, or inaccurate deductions can add up quickly. A payroll audit helps you catch and correct these errors before they lead to employee dissatisfaction or financial strain.

3. Prevent fraud

Payroll audits create a layer of accountability that makes it harder for fraudulent activity, like falsified hours or unauthorized bonuses, to go unnoticed. Reviewing records consistently can help you spot red flags early.

4. Improve employee satisfaction

Employees expect to be paid accurately and on time. When payroll is consistent and correct, it builds trust and reduces complaints or disputes related to compensation.

5. Identify inefficiencies

Payroll audits can reveal outdated processes or gaps in your system. Whether it's redundant data entry or inconsistencies in time tracking, audits give you the opportunity to streamline operations.

6. Support clean financial reporting

Because payroll is often one of the largest business expenses, auditing it ensures your financial statements reflect accurate labor costs—crucial for forecasting, budgeting, and year-end reporting.

How to audit payroll in 7 steps

Conducting a payroll audit may sound daunting, but with a structured approach, it becomes a manageable and insightful process. Whether you're doing it in-house or with outside support, here’s a step-by-step guide to ensure your payroll audit is thorough and effective:

Step 1. Define your audit timeline

Start by establishing a clear timeline and scope. Decide whether you're reviewing a full year, a quarter, or a specific pay period. Setting a defined timeframe helps keep your audit focused and ensures consistency in the data you’re analyzing.

Step 2. Collect payroll records and documentation

Gather all relevant documents, including payroll register, employee records, timesheets, tax filings, and benefits data. Having everything in one place makes it easier to cross-reference and identify discrepancies.

Step 3. Verify employee details

Review each employee’s personal and employment information, like job title, classification (employee vs. contractor), tax status, and hire date, to ensure everything is accurate and up to date.

Step 4. Confirm pay rates, hours worked, and total wages

Match recorded hours and salaries to what’s outlined in contracts or HR systems. This includes verifying hourly rates, overtime pay, bonuses, commissions, and any time-off pay to ensure calculations are correct.

Step 5. Review tax withholdings and deductions

Check that federal, state, and local payroll taxes have been correctly withheld and reported. Also, verify that deductions for benefits, retirement plans, and garnishments are accurate and compliant with regulations.

Step 6. Compare payroll to financial records

Cross-check your payroll reports with your general ledger or accounting software. This helps confirm that payroll expenses align with what's being reported financially and uncovers any inconsistencies between systems.

Step 7. Document findings and correct errors

Track any issues you identify and take prompt action to fix them. Keep detailed records of the audit process and your corrections so you can reference them in future audits or if you're ever reviewed by an external agency.

The ultimate payroll audit checklist

A successful payroll audit starts with a well-organized checklist. Having a clear list of tasks helps you stay focused, track progress, and ensure that no important steps are missed. Use the checklist below as your go-to guide for reviewing your payroll system from top to bottom.

This checklist is especially helpful for internal audits and can be customized based on your company’s size, structure, and payroll complexity.

Pro tip: Make a habit of using this checklist every quarter to stay ahead of errors and build a consistent, reliable payroll system.

By following this structured checklist, you’ll be able to perform a thorough audit that safeguards your business and supports a compliant, efficient payroll operation.

5 tips to run a payroll audit

Running a payroll audit is easier and more effective when you follow proven best practices. These tips can help HR managers, payroll auditors, and small business owners streamline the process, avoid common pitfalls, and get the most value from each audit.

1. Use payroll software to simplify the process

Modern payroll systems automate much of the recordkeeping and reporting you’ll need for an audit. With digital access to pay records, tax filings, and employee data, HR and payroll software like Rippling reduces the chance of human error and makes it easier to track changes over time.

2. Keep detailed, up-to-date records

Accurate recordkeeping is the foundation of a clean audit. Make sure employee information, time logs, tax forms, and payroll adjustments are consistently maintained and securely stored. The more organized your records are, the faster and more efficient your audit will be.

3. Involve an external auditor when needed

While internal audits are essential, bringing in a third-party auditor can provide an objective review and help identify issues your team might overlook. This is especially helpful during major business changes or before regulatory inspections.

4. Double-check worker classification

Misclassifying employees as independent contractors—or vice versa—is a common mistake that can lead to tax and legal consequences. Regular audits are a good opportunity to revisit how each worker is categorized and ensure it aligns with labor laws.

5. Communicate with key stakeholders

Include your HR, finance, and operations teams in the audit process. Payroll often touches multiple departments, so collaboration helps to bring to the surface important insights, clarify discrepancies, and improve processes across the board.

Payroll audit for international payroll

Auditing global payroll adds another layer of complexity, but it's just as essential (if not more so) for maintaining compliance and internal control. International operations involve multiple currencies, tax laws, and employee classifications, which makes a detailed payroll audit even more important.

Here are key practices to follow when conducting a payroll audit across international teams:

1. Consider local payroll regulations

Each country has its own labor laws, tax requirements, and reporting standards. As a payroll auditor reviewing international records, you’ll need to align your audit checklist with the specific rules of each country where your business operates. This ensures full compliance and helps prevent costly penalties or delays.

2. Verify employee classification

Correctly classifying international workers as employees or independent global contractors is critical. Misclassification can lead to regulatory issues, especially if benefits, taxes, or contracts don’t match legal expectations in a given country. Include classification checks as a standard part of your payroll audit checklist.

3. Check exchange rates and currency adjustments

In global payroll audits, it's essential to validate how exchange rates and currency conversions are handled in payroll software. Small miscalculations can impact net pay and tax reporting. An experienced payroll auditor will cross-check pay against real-time exchange rates to confirm accuracy.

4. Ensure proper documentation and audit trails

Strong internal control for payroll is especially important in international contexts. Keep detailed documentation for every transaction, including cross-border tax withholdings, benefits contributions, and international contractor agreements. A well-documented audit trail helps you track and explain discrepancies.

5. Use payroll software with international capabilities

Manually managing payroll across multiple countries is risky and inefficient. Using a unified platform that supports global compliance makes it easier to audit payroll at scale. Look for tools that offer automated local tax updates, built-in audit logs, and multi-currency support.

Streamline payroll accuracy with Rippling

Whether you’re auditing payroll for a single location or managing compensation across multiple countries, Rippling makes it easy to ensure payroll accuracy, automate compliance, and simplify your entire payroll workflow.

With Rippling's payroll software, you get:

• Audit-ready payroll data: Rippling creates a complete audit trail of every payroll run—including changes to pay rates, deductions, tax filings, and approvals—so you’re always prepared for internal reviews or external audits.
• 100% error-free guarantee: Just click “Run,” and Rippling automatically calculates payroll taxes and files them with the appropriate federal, state, and local agencies—ensuring accuracy every time.
• Global payroll compliance: Issue payments in local currencies and stay compliant with country-specific tax laws and labor regulations—no need to manage multiple vendors or systems.
• Configurable internal controls: Set role-based permissions and approval workflows so only the right people can access, edit, or approve payroll data, strengthening your internal control for payroll audits.
• Real-time updates across systems: When employee details like location, job title, or benefits change, Rippling automatically syncs that information across payroll, time tracking, and other systems—eliminating gaps and reducing audit risk.

Payroll audit FAQs

How much does a payroll audit cost?

The cost of a payroll audit can vary depending on the scope and whether it's conducted internally or by an external payroll auditor. Internal audits can often be done at minimal cost using your existing HR or finance resources—especially when supported by a detailed payroll audit checklist. External audits, such as those conducted by accounting firms or regulatory bodies, may range from a few hundred to several thousand dollars, depending on company size and complexity.

How often should payroll be audited?

At a minimum, companies should conduct a payroll audit annually. However, for organizations experiencing rapid growth, frequent hiring, or changes in payroll systems, more frequent reviews—quarterly or biannually—can help maintain strong internal control and prevent errors from accumulating.

What is involved in a payroll audit?

A payroll audit involves a step-by-step review of your payroll records, processes, and systems to ensure accuracy and compliance. Key tasks include verifying employee classifications, reviewing pay rates and hours worked, checking tax withholdings, and validating benefits deductions. A comprehensive payroll audit checklist helps keep the process organized and thorough.

What is the ideal sample size for a payroll audit?

If you're not reviewing 100% of your payroll records, a common practice is to audit a representative sample—typically 10% to 20% of employee files. A payroll auditor may choose a larger sample if there’s a history of payroll errors or if the organization has undergone recent changes like mergers or expansions. Sampling should still cover a variety of departments, job roles, and pay types to get an accurate picture of your payroll health.

This blog is based on information available to Rippling as of April 11, 2025.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.