What to Expect During a Payroll Audit & How to Prepare?

For many Canadian business owners, the term “payroll audit” can trigger immediate concern. It’s often associated with penalties, back payments, and time-consuming document requests. In reality, a payroll audit is simply a means for government agencies, most commonly the Canada Revenue Agency (CRA), to verify that payroll records are accurate and compliant with current regulations.

Understanding how payroll audits work and how to prepare for one can make the experience far less stressful. With accurate records and the right payroll support, most audits are conducted efficiently and without issue.

Understanding Payroll Audits in Canada

A payroll audit is a formal review of your payroll practices, records, and remittances to ensure that your business meets federal and provincial obligations. These audits typically focus on statutory deductions such as:

• Canada Pension Plan (CPP) contributions

• Employment Insurance (EI) premiums

• Income tax withholdings

• Accuracy of employee classifications

• Year-end reporting

While the CRA conducts most payroll audits, provincial agencies may also review payroll records in relation to employment standards, workers’ compensation, or employer health taxes. In many cases, auditors may request records going back several years, making long-term payroll accuracy especially important.

Why Payroll Audits Happen

Contrary to popular belief, a payroll audit does not necessarily mean your business has done anything wrong. Audits can be initiated for various reasons, including routine reviews or industry-wide checks. 

Certain payroll patterns, however, can increase the likelihood of an audit: 

• Inconsistent remittance amounts, late payments, or discrepancies between payroll records and T4 filings can attract attention.

• Rapid business growth can also be a trigger, practically if payroll remittances don’t scale alongside employee headcount. 

• Misclassifying employees as independent contractors remains one of the most frequent audit findings in Canada. 

What Happens During a Payroll Audit

Most payroll audits follow a structured, predictable process.

1. Businesses are typically notified in writing and provided with a list of requested documents and a timeline for submission. Audits may be conducted remotely or on-site, depending on the scope and complexity of the review.

2. Auditors will examine payroll registers, employee records, remittance confirmations, and year-end filings such as T4s and T4 Summaries. They may also compare payroll data against bank statements and accounting records to confirm consistency. During this stage, auditors often ask clarifying questions about payroll practices, employee classifications, or benefits.

3. Once the review is complete, the auditor will provide its findings. These may confirm full compliance, identify required corrections, or outline penalties and interest if discrepancies are found. Businesses with organized records and professional payroll support typically experience a faster and smoother audit process. 

Preparing for a Payroll Audit Before It Happens

The most effective way to handle a payroll audit is to prepare well in advance of its occurrence. Payroll accuracy is not just a year-end concern – it’s an ongoing responsibility.

Maintaining clear, accurate payroll records ensures that employee wages, vacation pay, overtime, and statutory deductions are properly documented. Payroll records should be easily accessible and retained for the required period under Canadian regulations.

Equally important is ensuring that employee classifications are correct and well-documented. Misclassification can result in significant retroactive penalties, even when errors are unintentional. Regular payroll reconciliations – ensuring payroll totals match CRA remittances and accounting records – help identify discrepancies early.

The Value of Professional Canadian Payroll Support During an Audit

Many payroll audit issues arise not from negligence but from complexity. Canadian payroll regulations vary by province, change frequently, and require precise calculations. Managing this internally can be time-consuming and risky, especially for a growing business.

Working with a professional payroll provider helps reduce audit exposure by ensuring calculations, deductions, and filings are completed accurately and on time. A dedicated payroll specialist can also assist with documentation requests and provide clarity during an audit.

At V-Tac Payroll Management, clients benefit from hands-on support, detailed payroll reporting, and a single point of contact who understands their business. Our proactive approach helps businesses remain compliant and prepared – long before an audit notice arrives. 

Staying Audit-Ready With V-Tac Payroll Management

Payroll audits are not something businesses can always prevent, but they are something they can be prepared for. Accurate payroll, consistent remittances, and proper documentation drastically reduce risk and stress.

When your payroll is handled correctly, audits become a formality – not a crisis. V-Tac Payroll Management supports Canadian businesses with:

• Accurate, CRA-compliant payroll processing

• Timely remittances and filings

• Clear, audit-ready payroll records

• Personalized service from payroll experts

A payroll audit doesn’t have to disrupt your business or cause unnecessary anxiety. With strong payroll practices and expert support, Canadian businesses can approach audits with confidence.

If you want to ensure your payroll is accurate, compliant, and audit-ready year-round, V-Tac Payroll Management is here to help. Request your free payroll quote today and get started with your first three months free!