Talking About Tax Services For Small Business Owners

5 Tips To Help You Surive A Payroll Audit

Often, a tax audit doesn't look at every detail of your return. Instead, it focuses on a single element of your return. If you own a business with employees, one of the potential audits you may face is a payroll audit. Here are five tips to help you survive a payroll audit. 

1. Gather your payroll records.

The IRS auditor will want to see your payroll records. Ideally, you should have detailed records that show how much you paid each employee plus the amounts you withheld from their paychecks for Social Security, Medicare, and income tax. 

You may be able to just show the auditor the last paystub for the year which shows the year-end totals for all of these categories. However, you may want to have access to your payroll software so that you can show the auditor records from specific time periods. 

For instance, if the auditor wants to reconcile your payroll records for a single quarter, you will need your payroll software to pull up those records. 

2. Find copies of payroll returns.

Also, make sure that you have copies of your payroll returns. Most employers file these quarterly. If you are a very very small employer, however, you may only file annually. 

It seems like the taxing authority should have these records since you filed with them, but unfortunately, that's not always the case. To be on the safe side, bring them to your meeting with the auditor. 

3. Have your bank account records nearby.

The auditor may want to look at your bank account records to ensure that everything is being processed correctly. For instance, they may want to see that you wrote a paycheck and reported the matching numbers on your payroll tax return. Then, they may want to see that checks for those amounts actually cleared your account. 

Payroll expenses are a business deduction. Thus, they lower your business's profits and by extension its tax liability. The auditor will want to ensure that you are actually spending the amounts you claim and that your deductions are legitimate.  

4. Ensure you can prove eligibility for contractor status.

In addition to looking at your traditional employees, the auditor may want to look at your contractors as well. In particular, they will want to ensure that your contractors aren't misclassified. Be ready to explain their jobs to the auditor. 

If your contractors don't meet the criteria to be classified as contractors, the auditor may require you to reclassify them as employees. At that point, you'll face back payroll taxes plus penalties. 

5. Provide requested information in a prompt manner. 

The audit process can be lengthy. To stay in the good graces of the auditor, make sure that you provide the requested information in a timely manner. You may want to get help from a tax consultant who understands the audit process.