How do you prepare for a payroll compliance audit?

A payroll compliance audit can arrive as a regulator visit or as an internal review designed to prevent exposure. This article gives an ordered, practical checklist you can run now to reconcile Single Touch Payroll (STP), PAYG withholding, superannuation and payroll tax records, stop common errors, and know exactly when to pause and call a specialist.

What a payroll compliance audit checks in Australia

Understanding the usual audit scope focuses your effort. A payroll compliance audit is a targeted review of payroll processes, records and controls to confirm employees received correct entitlements and tax reporting was accurate. Typical areas of review include the items below.

PAYG withholding and STP reporting

Auditors check that withholding amounts reported and paid match payroll calculations and that STP events accurately reflect year to date figures. Employers may be asked to reconcile STP exports to BAS reports and PAYG payment history. Auditors look for unexplained corrections, late reporting and gaps between STP and BAS totals.

Superannuation contributions and SGC

Auditors verify super guarantee calculations, due dates, employer contributions matching payroll records and remittance evidence from clearing houses. Underpayments or late payments often trigger follow up and remediation.

Employee classification and award entitlements

Reviewers confirm staff are correctly classified as employees or contractors and that award or enterprise agreement entitlements, overtime and penalty rates were applied correctly. Misclassification commonly causes back-pay liabilities and disputes.

Payroll tax registration and calculations

State payroll tax rules and registration obligations are assessed separately from federal PAYG. Revenue NSW, for example, audits registered employers and may contact unregistered businesses they believe should be registered when wages exceed the payroll tax threshold. Their guidance explains audit procedures and triggers.

Fringe benefits tax where relevant

If your organisation provides reportable fringe benefits auditors check FBT records, gross up calculations and any salary sacrifice arrangements that affect taxable wages.

Internal controls and authorisations

Audit teams test approval workflows, timesheet sign offs, payroll change authorisations and segregation of duties to reduce the risk of error or fraud. An HR payroll audit will flag weak controls and missing authorisation traces.

Internal checklist: ordered steps to run your payroll compliance audit

Run the steps in order. Each step ends with a simple test you can use to decide whether to proceed or escalate for specialist help.

1. Export and archive source reports

Export STP event history and employee year to date figures for the period under review.
Export payroll journals, general ledger extracts, BAS reports and bank payment confirmations.
Save files with clear names, date stamps and a read only copy for the audit pack.

Stop and test: can you open each file and match totals between STP YTD, payroll journal and BAS? If totals do not match, pause and move to Step 2.

2. Reconcile STP to PAYG and BAS

Compare STP reported withholding and gross wages to BAS PAYG figures and payment records.
Identify differences created by manual corrections, terminated employees or prepayments and document every adjustment.

Stop and test: if unexplained variances exist between STP and BAS that you cannot justify from adjustments, escalate to an adviser. For a targeted STP checklist see our single touch payroll compliance checklist.

3. Reconcile wages, super and bank payments

Match payroll journals to timesheet totals, pay runs and bank payments to employees and super funds.
Confirm super remittances and clearing house receipts for each pay period in scope.

Stop and test: if super totals do not match payroll calculations or clearing house receipts are missing treat this as a priority shortfall and consider external help.

4. Confirm employee classification and contract entitlements

Compare each employee record to their contract and award rates.
Document instances of casual, part time, full time and contractor status and the basis for classification.

Stop and test: reclassifications that change entitlements or tax outcomes require documented reasons and back pay calculations. If reclassification affects many staff engage a specialist.

5. Verify leave, overtime and rostered hours

Reconcile timesheets to paid leave, rostered hours and public holiday payments.
Look for duplicated entries, unapproved timesheet edits and missing approvals.

Stop and test: unresolved leave or overtime anomalies should be fixed with employee records and payroll corrections before finalising reconciliations.

6. Check payroll tax registration and reconciliation

Confirm payroll tax registration status and compare wages to payroll tax returns.
Identify periods where registration may have been required but not in place.

Stop and test: if you suspect unregistered payroll tax liability in NSW or another state seek tax advice immediately because state revenue offices actively review such cases. For NSW specific information see Revenue NSW payroll tax audits guidance.

7. Inspect fringe benefits and salary sacrifice records

Ensure FBT records, gross ups and any reportable fringe benefits are supported by invoices and declarations.
Confirm salary sacrifice adjustments were recorded and reported correctly in STP where required.

Stop and test: unclear or missing FBT evidence requires specialist review before you finalise employer liability figures.

8. Test internal controls and sign off traces

Confirm who approved pay runs, wage changes and timesheet edits and check audit trails in your payroll software.
List users with payroll access and review segregation of duties.

Stop and test: absent approvals or a collapsed approval workflow are governance failures and an external review is recommended to design compensating controls.

9. Document adjustments and build a remediation log

Keep a remediation log that records the issue, action taken, supporting evidence, date and owner.
Use the log to prepare disclosure notes if you decide to make a voluntary correction with regulators.

Stop and test: if adjustments involve historic underpayments or complex tax consequences obtain professional advice before lodging amendments or contacting regulators.

Documents and reports to gather now

Assemble the audit pack in advance. Required items usually include:

STP event history and employee year to date exports in CSV or PDF format.
Payroll journals, general ledger extracts and BAS statements for the review period.
Employee master files, contracts, award references and tax declarations.
Timesheets, rosters and approval records.
Bank payment confirmations for net wages and super remittances and clearing house receipts.
Payroll tax returns, registration evidence and FBT records if applicable.
Payroll system user access list and a copy of approval workflows.

Keep files organised with clear naming and date stamps. Regulators expect complete, dated records during an audit and organised data speeds the review.

For a concise STP focused list see our single touch payroll compliance checklist.

Common triggers and what Revenue NSW will check

Regulators act on data mismatches, tip offs and patterns that suggest underreporting. Triggers include late or missing payroll tax registration, sudden large adjustments to wages, repeated STP corrections and employee complaints. Revenue NSW conducts payroll tax audits to ensure the correct payroll tax has been paid and may contact unregistered businesses they believe should be registered. Their published guidance explains audit steps and potential outcomes.

Auditors also review PAYG and STP accuracy, super clearing house records and whether employee entitlements have been paid correctly. HR payroll audit resources emphasise that even small persistent errors can lead to disputes or regulatory follow up.

Common mistakes to fix first and quick remediation steps

Missing STP events or mismatched YTD totals

Action: re export STP data, reconcile to payroll journals and document corrections with dates and reasons. If gaps are older than twelve months get specialist advice.

Incorrect employee classification

Action: review contracts, document the classification basis, correct payroll runs and calculate any back pay entitlements. Complex cases need a legal or tax specialist.

Late or incomplete super contributions

Action: immediately calculate shortfalls, obtain clearing house receipts and prepare remittance. Consider voluntary disclosure to reduce exposure when appropriate.

Payroll tax misregistration

Action: check state thresholds and compare wages. If registration was required but not completed consult a tax adviser before contacting Revenue NSW.

When to pause and call an accountant or payroll specialist

Escalate to a specialist when you find any of the following: evidence of historical underpayments, STP gaps older than twelve months, uncertainty about payroll tax obligations across states, an employee dispute or formal claim, or a regulator contact or audit notice. A specialist can perform a technical review, prepare remediation plans, make voluntary disclosures and liaise with Revenue NSW or the ATO on your behalf. Advanced Accounting Taxation & Business Services provides payroll and STP compliance support and a free initial consultation to review your records.

Decision criteria: use in house fixes for isolated straightforward errors where supporting documents are complete. Use paid help when errors are systemic, historic or affect many employees because the cost of getting remediation wrong is higher than the cost of expert support.

After the audit: remediation, recordkeeping and ongoing compliance

After an audit or internal review follow a short ordered plan: record and prioritise remediation items, communicate with affected staff where required, correct STP events or lodge amendments, set a recurring reconciliation cadence and tighten approval workflows. Assign a named owner with service level expectations for payroll tasks and schedule periodic internal payroll audits to prevent recurrence. Use cloud payroll features to automate exports and approvals which reduces manual risk over time.

FAQ

What triggers a payroll compliance audit in NSW and who will contact me?

Triggers include mismatched wage totals, late payroll tax registration, repeated STP corrections, tip offs or employee complaints. Revenue NSW or the ATO may contact you directly if they identify an issue or if a tip off has been lodged. Check the Revenue NSW payroll tax audits guidance if you receive contact.

Does a payroll compliance audit always include Single Touch Payroll reporting?

Not always, but STP reporting is commonly reviewed because it provides the primary source for year to date wages and withholding. Auditors typically reconcile STP to BAS and PAYG figures during their checks.

What documents will the ATO or Revenue NSW request during a payroll audit?

Expect STP exports, payroll journals, BAS statements, employee contracts, timesheets, super remittance receipts, payroll tax returns and approval records. Organised, dated PDFs and CSVs speed the process.

How long does an internal payroll compliance audit take for an SME?

Duration varies with size and complexity. A focused internal audit for a small payroll can take a few days. Larger or historic issues will take longer and may need specialist support to resolve safely.

When should I engage an accountant rather than fix payroll issues in house?

If you find historic underpayments, state payroll tax uncertainty or the potential for employee claims engage an accountant. A specialist can prepare technical calculations, remediation plans and communicate with regulators to reduce the risk of escalating enforcement action.

Need expert help reviewing your payroll and STP records? Get a free initial consultation from Advanced Accounting Taxation & Business Services to discuss remediation options and next steps.