Embedded Payroll 101: Fraud, Credit Loss, and Security

Behind the Paycheck

The Embedded Payroll 101 Series – Movement of Funds  |  Fraud, Credit Loss, and Security Tax  |  Payroll Calculations  |  Payments, Filings, Compliance  |  Migrations & Transfers

How payroll providers should think about fraud, credit loss, and security

Offering payroll software that calculates up to 99.99% accuracy and assists with tax payment and filing is just a portion of what a payroll provider needs to think about when creating a functional product for their customers. Unfortunately, the complexity and messiness of payroll continue when the element of crime comes into play. When neglected or handled poorly, fraud, credit loss, and security can profoundly affect the performance of payroll technology and negatively affect the business that uses them.

What fraud, credit loss, and security mean to business

Fraud costs companies millions every year. In the aftermath of COVID-19 and the changes in the workforce, fraud has only grown and is anticipated to become more of a problem as technology changes, giving thieves various opportunities to divert funds away from the people who rightfully earned them.

Due to their size, companies with less than 100 employees are twice as likely to experience fraud over larger companies. This is because fewer people monitor fraudulent actions or work with fewer funds to counter the problem. Nevertheless, they need extra protection.

In worst-case scenarios, it can take up to 24 months before a company realizes that a fraudulent action has been taking place with their payroll. That is two years that funds have been diverted from the company’s budget or stolen from hard-working employees.

This cost only rises after businesses learn about the loss of money due to theft and have no choice but to get involved with timely and costly legal battles to prosecute the guilty and recover those lost funds.

How fraud, credit loss, and security affects payroll

Because of the fraud’s significant impact on businesses, many regulators and banks impose technical and organizational controls (AML & KYC) to combat money laundering and fraud. Failure to maintain those controls means the payroll solutions lose access to move funds.

Sometimes losses for payroll providers don’t have a nefarious cause, just a mistake or a wrong turn for their customers. For example, imagine the customer may initiate a payroll run, and the payroll provider later discovers the funds were already debited from the customer’s account. These errors leave the payroll provider with no choice but to collect from the customer, which damages the customer’s relationship with their employees and the payroll provider’s relationship with their customers.

How to counter payroll fraud, credit loss, and security breaches

As a payroll provider, it is essential to understand that you bear some responsibility for preventing fraud. But, for as many means as there are for cyber thieves to rob from company payroll, there are just as many means for payroll providers to offer countermeasures to their customers.

Internal threats

As discouraging as it might be for many businesses to realize, the most common form of payroll fraud occurs internally. Fraudsters employed by organizations deliberately target payroll due to the multiple ways they can steal from it.

Employees can participate in timesheet fraud that includes padding work hours or engaging in “Buddy Punching,” where one employee punches in for another who is not present to work. One solution is a system requiring supervisor reviews and approvals of employee work hours, reducing the chances of timesheet fraud. Also, a time tracking system that uses biometrics for employees to punch in and out will eliminate the fraudulent “buddy punching.”

Other fraudulent practices occur when employees in positions of authority collect wages they did not earn. They do this by receiving payments from ghost employees they created or nonexistent employees that they did not take off payroll after leaving the company. Software with the capacity to create audits of payroll records can spot paychecks going out to nonexistent employees or discover employees with duplicate bank accounts.

External threats

So, as a payroll provider, there are internal threads to contend with and external threats that are just as damaging.

Bank accounts can be hijacked, or personal information can be stolen by cyber thieves, all with the means to redirect and steal money. Software providers that offer monitoring systems keep a lookout for these malicious actions.

Also, payroll providers can partner with a knowledgeable embedded payroll provider who can help understand how this happens and manage these risks, decreasing the likelihood of thieves finding ways to siphon money from the bottom line.

How education helps counter payroll fraud, credit loss, and security

Businesses are estimated to lose about five percent of their revenue annually to fraud. This loss can account for slower growth and fewer goals when trying to grow a business.

So, the best defense for any fraud loss is education. A payroll provider that makes their customers aware that this happens and how internal thieves and external cyber thieves are accomplishing their illegal actions lessens the threat substantially.

Also, a customer support system available 24/7 to answer frequent questions and provide risk programs so customers know what to look for allows customers to go on the offensive.


As the age of digital advances, so do the opportunities for cyber thieves. As a result, payroll providers need to be knowledgeable of criminals who continually and aggressively discover new means of stealing money from organizations and their employees. In addition, payroll organizations should constantly think about how to protect their customers from fraud.

Learn more about Embedded Payroll

Download the The Embedded Payroll Stack eBook and the Payroll Beyond the Paycheck White Paper.

Updated: November 14, 2022

Daniel Dean With over 10 years experience in HR tech, Daniel is passionate about payroll and everything HR. As a Gusto Embedded Sr. Product Marketing Manager, he believes this is one of the most exciting times for HR. Whether you're a HR professional, payroll administrator, business owner, or work for a SaaS solution provider, he believes we all have an important role to play in shaping the future world of work for the better.
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