5 Types of Payroll Fraud Every Small Business Owner Should Know

When people think of payroll fraud, they usually picture a fake employee collecting paychecks. That is one scheme, but it is far from the only one. Payroll fraud is one of the longest-running and most expensive categories of internal fraud precisely because it hides inside a routine, recurring process that few owners examine closely.

Here are the five most common forms, and what stops each.

1. Ghost employees

A fake or terminated worker stays on the payroll, with paychecks routed to an account the fraudster controls. The control: reconcile payroll against a verified, current headcount every period, and separate the ability to add employees from the ability to approve pay runs.

2. Inflated hours and overtime

A real employee, or a manager acting on their behalf, pads timesheets with hours never worked or overtime never earned. Over a year, small additions add up to real money. The control: require supervisor approval of hours by someone who did not record them, and watch for employees whose hours consistently exceed the norm for their role.

3. Pay rate tampering

Someone with access quietly bumps a pay rate, often their own or a colleague's, betting that no one checks the math. The control: lock down who can change pay rates, and review any rate change against an approval record.

4. Commission and bonus schemes

In businesses that pay commissions, employees may inflate sales, claim commissions on canceled deals, or manipulate the timing of bonuses. The control: tie commission payouts to verified, completed transactions rather than self-reported numbers.

5. Expense reimbursement fraud

Technically adjacent to payroll, this is one of the most common employee frauds of all: padded mileage, personal purchases disguised as business expenses, duplicate reimbursement claims, or inflated receipts. The control: require itemized receipts, set clear policies, and watch for employees who consistently submit round numbers or just-under-the-limit claims.

The common thread

Notice the pattern across all five: each scheme survives because one person has enough unchecked control over part of the payroll process. The single most powerful defense is separation of duties, making sure the person who records is not the same person who approves or pays.

For a small business where the same one or two people handle everything, that separation is hard to achieve through staffing alone. That is where automated monitoring earns its keep.

Where Sherlock fits

Sherlock reviews your payroll and reimbursement transactions for the fingerprints of these schemes: pay that continues past a termination, totals that climb without new hires, reimbursement claims that cluster suspiciously, and payments that do not match your verified records. It gives a small team the kind of second-look oversight that larger companies get from a dedicated finance department.

Want a clearer picture of where your payroll dollars are going? Sherlock can help you spot the patterns worth a closer look.