Payroll Compliance Audit

Performs comprehensive payroll audits including worker classification, overtime, tax withholding accuracy, compliance checklists, and generates detailed repo...

1kalin@1kalin

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Payroll Compliance Auditor

Run a full payroll audit in under 10 minutes. Catches the errors that cost companies $845 per violation.

What It Does

Classifies workers (W-2 vs 1099) using the IRS 20-factor test
Audits overtime calculations against FLSA rules
Checks tax withholding accuracy (federal, state, local)
Flags misclassification risk with dollar-amount exposure estimates
Generates quarterly compliance checklists
Produces audit-ready reports for DOL or state agency reviews

How to Use

Tell your agent:

Full payroll audit: "Run a payroll compliance audit for [company]. We have [X] employees across [states]. Pay frequency is [weekly/biweekly/monthly]."

Worker classification check: "Check if these roles should be W-2 or 1099: [list roles with descriptions]."

Overtime audit: "Audit overtime compliance. Our employees work [schedule]. We're in [state]. Current OT policy: [describe]."

Tax withholding review: "Review tax withholding setup for employees in [states]. We use [payroll provider]."

Audit Framework

1. Worker Classification (IRS 20-Factor Test)

Score each worker across three categories:

Behavioral Control (6 factors): Instructions, training, integration, personal services, hiring assistants, work hours
Financial Control (5 factors): Business expenses, investment, profit/loss opportunity, market availability, method of payment
Relationship Type (4 factors): Written contracts, benefits, permanency, key services

Risk levels:

0-4 factors toward employee → Low risk (likely contractor)
5-9 factors → Medium risk (review needed)
10+ factors → High risk (likely misclassified)

Penalty exposure per misclassified worker:

Back employment taxes: 15.3% of wages
FLSA overtime liability: up to 3 years back pay
Benefits liability: retirement, health, PTO
IRS penalties: $50-$260 per W-2 failure
State penalties vary: $5K-$25K per violation (CA, NY, MA highest)

2. Overtime Compliance (FLSA + State)

Check against federal AND state rules (state wins when more generous):

Rule	Federal (FLSA)	California	New York	Washington
OT threshold	40 hrs/week	8 hrs/day OR 40/week	40 hrs/week	40 hrs/week
OT rate	1.5x	1.5x (2x after 12 hrs/day)	1.5x	1.5x
Salary exemption	$58,656/yr (2026)	$66,560/yr	$62,400/yr (NYC)	$67,724.80/yr
7th day rule	None	1.5x first 8 hrs, 2x after	None	None

Common violations:

Averaging hours across two weeks (illegal under FLSA)
Not paying OT on bonuses/commissions
Misclassifying non-exempt as exempt
Rounding errors exceeding 7-minute threshold
Auto-deducting meal breaks not actually taken

3. Tax Withholding Accuracy

Verify against current tables:

Federal:

2026 FICA: 6.2% SS (wage base $174,900) + 1.45% Medicare
Additional Medicare: 0.9% above $200K single / $250K married
FUTA: 6.0% first $7,000 (5.4% credit = 0.6% effective)

State cross-checks:

SUI rates (experience-rated — verify annual notice)
SDI/PFL (CA, NJ, NY, WA, MA, CT, OR, CO, MD)
Local taxes (NYC, Philadelphia, San Francisco, etc.)
Reciprocity agreements (employees in different state than work)

4. Quarterly Compliance Checklist

Monthly:

Reconcile payroll register to GL
Verify new hire reporting (within 20 days)
Check garnishment calculations
Review PTO accrual accuracy

Quarterly:

File Form 941 (federal) by last day of following month
File state unemployment reports
Reconcile YTD withholdings to pay stubs
Review contractor payments approaching $600 threshold
Audit benefit deductions against enrollment

Annual:

W-2 distribution by January 31
1099-NEC filing by January 31
ACA reporting (1095-C) by March 2
Update salary exemption thresholds
Review state minimum wage changes
Workers' comp audit preparation

5. Audit Report Format

text

PAYROLL COMPLIANCE AUDIT REPORT
Company: [Name]
Period: [Q1/Q2/Q3/Q4 YYYY]
Employees: [Count]
States: [List]
Audit Date: [Date]

EXECUTIVE SUMMARY
Overall Risk Score: [Low/Medium/High/Critical]
Issues Found: [Count]
Estimated Exposure: $[Amount]

FINDINGS
[F-001] [Category] - [Severity]
Description: [What's wrong]
Exposure: $[Amount]
Remediation: [Fix]
Deadline: [Date]

RECOMMENDATIONS
1. [Priority action]
2. [Secondary action]
3. [Long-term improvement]

Cost of Getting It Wrong

Violation	Average Penalty
Misclassification (per worker)	$12,000-$25,000
FLSA overtime (per employee)	$1,000-$10,000 + back pay
Late W-2/1099 filing	$50-$580 per form
Failure to deposit taxes	2%-15% of deposit
Willful failure	$100K+ fine + criminal

The DOL recovered $274M in back wages in 2024. Average investigation finds $1,150 per employee owed.

Who This Is For

HR teams without dedicated payroll compliance staff
Growing companies expanding to new states
Businesses using contractors heavily (tech, construction, healthcare)
Anyone who just got a DOL audit letter

Built by AfrexAI — AI context packs for business operations. Full compliance automation: $47 Professional Services Pack.

Calculate what payroll errors are costing you: AI Revenue Calculator

Set up your own compliance agent in 5 minutes: Agent Setup Wizard