Payroll Fraud: How to Spot It Before It Costs You

Payroll fraud is one of those threats most business owners don’t see coming—until it’s already done some real damage. It doesn’t just happen at big companies with giant payroll departments. Small and mid-sized businesses are often the ones who take the biggest hit because they may not have layers of oversight or dedicated payroll roles in place.

So, how do you stay ahead of it? Let’s break down how payroll fraud happens, the warning signs to watch for, and practical steps to protect your business before it becomes an expensive lesson.

What Is Payroll Fraud?

Payroll fraud happens when someone manipulates payroll systems in a way that results in unauthorized pay. It could be an employee taking advantage of weak controls or a payroll admin with too much unchecked access. Sometimes, it’s not even intentional at first—an “innocent favor” between employees can become a recurring problem.

Unlike a simple payroll mistake, payroll fraud is intentionally deceptive and designed to go unnoticed. And because payroll touches every part of your business, even small manipulations add up quickly.

How Much Does Payroll Fraud Really Cost?

According to industry research, payroll fraud affects approximately 1 in 4 small businesses and often continues for up to two years before being detected. By then, losses typically reach tens of thousands of dollars—sometimes far more.

Beyond financial losses, the damage can reach:

• Staff morale and trust

• Reputation within your market

• IRS or Department of Labor investigations

• Legal fees and penalties

Common Types of Payroll Fraud

There isn’t just one way payroll fraud happens. Here are the schemes we see most often:

Timesheet & Time Theft

Not every fraudster is sitting in a dark room hacking into payroll software. Sometimes it’s as simple as punching in early, punching out late, or asking a friend to clock in when they’re still on the road.

Manual timecards and lenient approval processes make this one especially easy.

Ghost Employees

This one sounds spooky—because it is. Ghost employees are people who don’t actually work for you but still get paid.

This can happen when:

• Fake employee records are created

• A past employee is never removed from payroll

• A contractor is listed as a full-time worker

Someone with payroll access funnels that money right into their own pocket.

Misclassification & Pay Rate Manipulation

Changing someone’s pay rate without approval or quietly shifting their classification to avoid overtime pay—both are forms of payroll fraud. And they can get your business into legal trouble fast.

Commission & Bonus Manipulation

If your team earns variable pay, it’s easier for someone to:

• Adjust commission rates

• Inflate performance numbers

• Issue unapproved bonuses

Unless you’re reviewing reports carefully, these can slip by.

Expense Reimbursement Fraud

Some employees use payroll reimbursement as a sneakier way to submit personal expenses—hoping no one double-checks the receipts.

Payroll Fraud Red Flags You Should Never Ignore

How can you tell if something’s not right? These warning signs are worth investigating:

• Payroll costs don’t match headcount

• Duplicate or incomplete employee records

• Employees reporting pay discrepancies

• High overtime for specific workers

• Payroll administrator refuses cross-checks

• Sudden pay rate changes without documentation

• Manual adjustments become a “normal” part of payroll

If any of these feel familiar, it’s time to dig a little deeper.

How to Prevent Payroll Fraud

Stopping payroll fraud isn’t about suspicion, it’s about building stronger systems and accountability. Here’s what works best:

• Use Digital Time Tracking: Automated timekeeping reduces buddy punching and manual edits. Review records and require manager approvals to keep it accurate.
• Monitor Payroll Reports Regularly: Compare active employee lists with payroll payouts. Run exception reports and keep a close eye on adjustments.
• Separate Payroll Duties: No single employee should control the entire process. Split responsibilities like entering hours, approving pay, and reconciling records.
• Strengthen Access Controls: Only give staff access to what they truly need. Review permissions often, especially after role changes or departures.
• Conduct Routine Audits: Internal or third-party audits can reveal blind spots before fraud does. Random check-ins keep everyone honest.

How Horizon Payroll Helps Protect Your Business

Payroll shouldn’t feel like a risk. When you work with Horizon Payroll, you gain an extra layer of defense against fraud, because our systems are built to catch discrepancies early.

Here’s how we support you:

• Advanced payroll technology with automated controls

• Secure digital time tracking that keeps hours honest

• Clear approval workflows and transparent reporting

• Expert guidance to stay compliant with wage laws

• Ongoing support that never leaves you guessing

We help you create a payroll process that’s clean, accurate, and protected, so fraud never gets a chance to sneak in.

Final Thoughts

Payroll fraud might be more common than most business owners realize. But with the right tools and preventative measures, you can spot it fast, or stop it from happening at all. If you’re ready to add stronger payroll protection and reduce risk across your organization, we’re here to help.

Contact Horizon Payroll today to learn how we safeguard your payroll from start to finish.