---
name: payroll-compliance-auditor-918bf8fa46bf
description: Run a full payroll audit in under 10 minutes. Catches the errors
  that cost companies $845 per violation.
---

# Payroll Compliance Auditor

Run a full payroll audit in under 10 minutes. Catches the errors that cost companies $845 per violation.

## What It Does
- Classifies workers (W-2 vs 1099) using the IRS 20-factor test
- Audits overtime calculations against FLSA rules
- Checks tax withholding accuracy (federal, state, local)
- Flags misclassification risk with dollar-amount exposure estimates
- Generates quarterly compliance checklists
- Produces audit-ready reports for DOL or state agency reviews

## How to Use

Tell your agent:

**Full payroll audit:**
"Run a payroll compliance audit for [company]. We have [X] employees across [states]. Pay frequency is [weekly/biweekly/monthly]."

**Worker classification check:**
"Check if these roles should be W-2 or 1099: [list roles with descriptions]."

**Overtime audit:**
"Audit overtime compliance. Our employees work [schedule]. We're in [state]. Current OT policy: [describe]."

**Tax withholding review:**
"Review tax withholding setup for employees in [states]. We use [payroll provider]."

## Audit Framework

### 1. Worker Classification (IRS 20-Factor Test)
Score each worker across three categories:
- **Behavioral Control** (6 factors): Instructions, training, integration, personal services, hiring assistants, work hours
- **Financial Control** (5 factors): Business expenses, investment, profit/loss opportunity, market availability, method of payment
- **Relationship Type** (4 factors): Written contracts, benefits, permanency, key services

**Risk levels:**
- 0-4 factors toward employee → Low risk (likely contractor)
- 5-9 factors → Medium risk (review needed)
- 10+ factors → High risk (likely misclassified)

**Penalty exposure per misclassified worker:**
- Back employment taxes: 15.3% of wages
- FLSA overtime liability: up to 3 years back pay
- Benefits liability: retirement, health, PTO
- IRS penalties: $50-$260 per W-2 failure
- State penalties vary: $5K-$25K per violation (CA, NY, MA highest)

### 2. Overtime Compliance (FLSA + State)
Check against federal AND state rules (state wins when more generous):

| Rule | Federal (FLSA) | California | New York | Washington |
|------|---------------|------------|----------|------------|
| OT threshold | 40 hrs/week | 8 hrs/day OR 40/week | 40 hrs/week | 40 hrs/week |
| OT rate | 1.5x | 1.5x (2x after 12 hrs/day) | 1.5x | 1.5x |
| Salary exemption | $58,656/yr (2026) | $66,560/yr | $62,400/yr (NYC) | $67,724.80/yr |
| 7th day rule | None | 1.5x first 8 hrs, 2x after | None | None |

**Common violations:**
- Averaging hours across two weeks (illegal under FLSA)
- Not paying OT on bonuses/commissions
- Misclassifying non-exempt as exempt
- Rounding errors exceeding 7-minute threshold
- Auto-deducting meal breaks not actually taken

### 3. Tax Withholding Accuracy
Verify against current tables:

**Federal:**
- 2026 FICA: 6.2% SS (wage base $174,900) + 1.45% Medicare
- Additional Medicare: 0.9% above $200K single / $250K married
- FUTA: 6.0% first $7,000 (5.4% credit = 0.6% effective)

**State cross-checks:**
- SUI rates (experience-rated — verify annual notice)
- SDI/PFL (CA, NJ, NY, WA, MA, CT, OR, CO, MD)
- Local taxes (NYC, Philadelphia, San Francisco, etc.)
- Reciprocity agreements (employees in different state than work)

### 4. Quarterly Compliance Checklist

**Monthly:**
- [ ] Reconcile payroll register to GL
- [ ] Verify new hire reporting (within 20 days)
- [ ] Check garnishment calculations
- [ ] Review PTO accrual accuracy

**Quarterly:**
- [ ] File Form 941 (federal) by last day of following month
- [ ] File state unemployment reports
- [ ] Reconcile YTD withholdings to pay stubs
- [ ] Review contractor payments approaching $600 threshold
- [ ] Audit benefit deductions against enrollment

**Annual:**
- [ ] W-2 distribution by January 31
- [ ] 1099-NEC filing by January 31
- [ ] ACA reporting (1095-C) by March 2
- [ ] Update salary exemption thresholds
- [ ] Review state minimum wage changes
- [ ] Workers' comp audit preparation

### 5. Audit Report Format

```
PAYROLL COMPLIANCE AUDIT REPORT
Company: [Name]
Period: [Q1/Q2/Q3/Q4 YYYY]
Employees: [Count]
States: [List]
Audit Date: [Date]

EXECUTIVE SUMMARY
Overall Risk Score: [Low/Medium/High/Critical]
Issues Found: [Count]
Estimated Exposure: $[Amount]

FINDINGS
[F-001] [Category] - [Severity]
Description: [What's wrong]
Exposure: $[Amount]
Remediation: [Fix]
Deadline: [Date]

RECOMMENDATIONS
1. [Priority action]
2. [Secondary action]
3. [Long-term improvement]
```

## Cost of Getting It Wrong

| Violation | Average Penalty |
|-----------|----------------|
| Misclassification (per worker) | $12,000-$25,000 |
| FLSA overtime (per employee) | $1,000-$10,000 + back pay |
| Late W-2/1099 filing | $50-$580 per form |
| Failure to deposit taxes | 2%-15% of deposit |
| Willful failure | $100K+ fine + criminal |

The DOL recovered $274M in back wages in 2024. Average investigation finds $1,150 per employee owed.

## Who This Is For
- HR teams without dedicated payroll compliance staff
- Growing companies expanding to new states
- Businesses using contractors heavily (tech, construction, healthcare)
- Anyone who just got a DOL audit letter

---

*Built by [AfrexAI](https://afrexai-cto.github.io/context-packs/) — AI context packs for business operations. Full compliance automation: [$47 Professional Services Pack](https://afrexai-cto.github.io/context-packs/).*

*Calculate what payroll errors are costing you: [AI Revenue Calculator](https://afrexai-cto.github.io/ai-revenue-calculator/)*

*Set up your own compliance agent in 5 minutes: [Agent Setup Wizard](https://afrexai-cto.github.io/agent-setup/)*


---
Source attribution: modbender
Original project: https://github.com/modbender/skill-library-mcp/blob/d9c8fe903b5b4e82237dbe8d0df8567783022e18/data/afrexai-payroll-audit/SKILL.md
License: MIT
License information: https://opensource.org/license/mit
Original upstream instructions; downloaded from Mega AI Hub.

## Upstream license notice

MIT License

Copyright (c) 2025 skill-library-mcp contributors

Permission is hereby granted, free of charge, to any person obtaining a copy
of this software and associated documentation files (the "Software"), to deal
in the Software without restriction, including without limitation the rights
to use, copy, modify, merge, publish, distribute, sublicense, and/or sell
copies of the Software, and to permit persons to whom the Software is
furnished to do so, subject to the following conditions:

The above copyright notice and this permission notice shall be included in all
copies or substantial portions of the Software.

THE SOFTWARE IS PROVIDED "AS IS", WITHOUT WARRANTY OF ANY KIND, EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. IN NO EVENT SHALL THE
AUTHORS OR COPYRIGHT HOLDERS BE LIABLE FOR ANY CLAIM, DAMAGES OR OTHER
LIABILITY, WHETHER IN AN ACTION OF CONTRACT, TORT OR OTHERWISE, ARISING FROM,
OUT OF OR IN CONNECTION WITH THE SOFTWARE OR THE USE OR OTHER DEALINGS IN THE
SOFTWARE.



# Mega AI Hub resource metadata

Creator / publisher: modbender
Original project: https://github.com/modbender/skill-library-mcp/blob/d9c8fe903b5b4e82237dbe8d0df8567783022e18/data/afrexai-payroll-audit/SKILL.md
Attribution basis: Source repository record

Fields of work: Finance & Accounting
Roles: Accountant, Payroll Specialist, Tax Specialist
Specialties: Specialty not specified
Tools: Tool not specified
Country applicability: Country not specified
Classification basis: Source catalog labels
Instruction SHA-256: 910db867c6f65ecbba7135b72c32bf288cb6a28aa624e5ce61af301ed3b29c1a