Payroll fraud isn’t just a big business problem it hits small businesses harder. 

The Association of Certified Fraud Examiners (ACFE) reports small businesses are twice as likely to experience payroll fraud, with median losses over $62,000 per case. 

Here’s what to watch for and how to protect your team and your bottom line. 

Common Payroll Fraud Schemes 

1. Ghost Employees
   Fake workers are added to payroll, and someone collects the checks.
     Watch for duplicate direct deposit info or employees with no tax records. 
2. Falsified Hours
   Inflated timecards or “buddy punching” pad paychecks.
     Look for excessive OT or too-perfect hour totals. 
3. Pay Rate Manipulation
   Temporary increases go unnoticed and lead to overpayment.
     Audit pay rate changes especially near payroll deadlines. 
4. Reimbursement Abuse
   Employees submit fake or inflated expenses.
   Require receipts and manager approvals. 
5. Employee Misclassification
   Workers are wrongly labeled as contractors to avoid taxes.
   Review roles and responsibilities regularly. 

 How to Prevent Payroll Fraud 

• Separate duties across payroll, HR, and finance 
• Use secure, cloud-based payroll software with audit trails 
• Automate time tracking to reduce manual errors 
• Audit employee rosters and pay rates quarterly 
• Train managers to flag red flags before they become losses 

Bottom Line 

Payroll fraud is costly but preventable. Catching it early can save thousands and protect employee trust.