A certified payroll compliance audit is one of the most critical evaluations a federal contractor can face. Whether you're new to Davis-Bacon projects or a seasoned contractor with hundreds of certified payrolls submitted, knowing how to prepare for a payroll audit is essential to staying compliant and avoiding costly penalties. A payroll compliance auditor will review your documentation, accuracy, and adherence to federal labor standards, and even minor mistakes can trigger serious consequences.
Understanding what a payroll audit is, what documents you'll need, and how payroll auditing works in real-world scenarios can make the process less stressful and more successful.
What Is a Payroll Audit and Why Does It Happen?
To put it simply, a payroll audit is a formal review of a contractor's payroll records to ensure compliance with applicable labor laws. For companies working on government-funded projects, this typically includes compliance with the Davis-Bacon and Related Acts (DBRA). These laws require contractors to pay workers the correct prevailing wage and submit accurate certified payroll reports.
A payroll compliance audit can be scheduled or unannounced, and it may be triggered by a routine review, random sampling, or a complaint from a worker or union. During the audit, a payroll compliance auditor will review your certified payroll records, compare wage rates to wage determinations, and look for discrepancies in worker classifications, fringe benefit payments, hours worked, and deductions.
Preparing for a Payroll Compliance Audit: What to Expect
If you're about to undergo a payroll compliance audit, preparation is key. The audit may involve several elements, including documentation review, on-site interviews, and a comparison of payroll submissions with actual job site conditions. Understanding each of these components will help you avoid surprises.
A payroll compliance auditor may examine:
Certified payroll reports (typically WH-347 forms)
Original timecards or electronic timekeeping records
Pay stubs and canceled checks or direct deposit records
Fringe benefit documentation (e.g., contributions to pension plans or health insurance)
Employee classification records
Jobsite postings of wage determinations and compliance posters
Labor Standards Interview forms (SF-1445) if interviews were conducted
Common Mistakes Found During Payroll Audits
Even experienced contractors can make mistakes when it comes to payroll auditing, especially when juggling multiple projects or relying on manual processes. Some of the most common issues flagged by payroll compliance auditors include:
Incorrect work classifications: Paying a laborer as an electrician or vice versa
Inaccurate wage rates: Failing to apply the correct wage determination
Improper or missing fringe benefit documentation
Incomplete certified payroll submissions
Overtime violations
Unauthorized deductions beyond Taxes and Social Security
How to Conduct a Payroll Audit Before the Government Does
One of the most effective ways to prepare for a certified payroll audit is to regularly conduct a payroll audit internally. This means building an audit-ready process into your payroll workflow.
Start by ensuring you have a clear audit trail. Every entry on your certified payroll report should be verifiable through timecards, pay stubs, and/or project records. Make sure wage rates and classifications align with the correct wage determination, and that fringe benefits are being handled properly.
Here are some things that should be included in your internal payroll audit checklist:
Reviewing classification and wage accuracy for each employee
Verifying overtime pay calculations and proper compensation
Cross-checking fringe benefit contributions against what's reported
Ensuring that posters and wage determinations are displayed on-site
Confirming that deductions follow federal guidelines
Using certified payroll software like eMars helps eliminate many of the errors that payroll compliance auditors commonly find. With automation, recordkeeping, and compliance checks built in, you can reduce manual oversight and maintain audit-ready at all times.
What Happens During an Actual Certified Payroll Audit?
When the payroll compliance auditor arrives (whether in person or via document request), you'll be asked to submit documentation for one or more projects and may need to answer questions or provide explanations for your records.
In some cases, the auditor may also conduct worker interviews. These interviews are confidential and used to compare the employee's reported work duties, wage rate, and hours with the information in your certified payroll. This is why keeping clean records is essential: any discrepancies can be interpreted as violations, even if they're unintentional.
If you've maintained consistent payroll auditing practices internally, you'll be in a strong position to pass with minimal findings.
How to Respond to Findings from a Payroll Compliance Auditor
If the auditor discovers discrepancies or violations, they will issue findings. This can lead to corrective actions such as wage restitution, submission of revised certified payrolls, or further investigation.
In some cases, if the issue is serious or repeated, your company may face withheld payments or even be barred from bidding on future federal work. Responding promptly and cooperatively is key.
It's also important to document your responses thoroughly. Keep a copy of all communications with the auditor, track any payments made to correct underpaid wages, and maintain proof of compliance updates going forward.
Why Contractors Choose eMars to Simplify Payroll Auditing
Certified payroll compliance is complex, but your process doesn't have to be. At eMars, we've helped thousands of contractors reduce risk and streamline compliance through our easy-to-use certified payroll reporting software.
With eMars, contractors can:
Ensure wage accuracy with automated validations
Store and retrieve payroll records instantly for audit readiness
Eliminate manual errors with smart reporting tools
Stay aligned with Davis-Bacon prevailing wage laws
Handle fringe benefits, deductions, and overtime with full transparency
Prepare confidently for payroll audits at any time
Whether you're conducting a payroll audit internally or responding to a payroll compliance auditor, eMars makes the process faster, clearer, and more secure.
Final Thoughts: Be Audit-Ready, Always
Payroll audits don't have to be stressful. With the right preparation and systems in place, you can approach any payroll auditing process with confidence.
Understanding what a payroll audit is, how to conduct one internally, and how to work with a payroll compliance auditor sets your company up for long-term success.
At eMars, we believe that compliance should empower contractors, not slow them down. Let us help you stay compliant, audit-ready, and focused on winning more work. Schedule a free demo today!