Payroll Fraud Risks in 2025 & How to Protect Your Business

Payroll fraud may not make headlines like cyberattacks or data breaches, but it can quietly drain a company’s finances and in 2025, the risks are only growing. With emerging tech like AI and increasingly sophisticated scams, protecting your payroll data isn’t just smart, it’s necessary. As a business, you must ensure payroll security.

Individuals that commit payroll fraud or unlawfully access sensitive information should be aware that there will be legal consequences. This poses a significant risk to businesses, with recent statistics highlighting its prevalence and impact alongside data breaches and the importance of maintaining accurate payroll records:

Revenue Loss: Companies lose an estimated 5% of their revenue each year due to fraud, totaling approximately $3.1 billion in losses from January 2022 to September 2023. (Accounting Today)
Prevalence in Small Businesses: Payroll fraud is about 1.5 times more likely to occur in businesses with fewer than 100 employees, with 14% of cases in small businesses compared to 9% in larger ones. (CIPP)
Median Loss: The median loss per payroll fraud case is around $50,000, with such cases typically lasting 18 months before detection, costing approximately $2,800 per month. (CIPP)

So how do you protect your business from payroll fraud in 2025? One key aspect, among the best practices, is implementing security training for your staff. Let’s break down the risks, what’s new, and how you can stay one step ahead.

The Rising Threat of Payroll Fraud in 2025

This isn’t new but it’s evolving, particularly with the rise of occupational fraud. With AI-generated deepfake voices and sensitive data documents, fraudsters can impersonate executives, submit and manipulate timesheets, or change bank routing information faster than ever before, raising concerns about potential data breaches.

Increased Payroll Security Risks for Small Businesses

This continues to pose significant challenges for small businesses across the United States, leading to severe financial losses . Here are some recent instances highlighting the impact and methods of such fraudulent activities:

Embezzlement in Illinois: A woman was recently charged to 51 months in federal prison for embezzling over $100,000 from a heating and air business where she worked as an office manager. She exploited her access to the company’s financial systems to issue more than 100 fraudulent checks to herself, disguising them as payroll and loans.

Payroll Lending Scheme in Georgia: A man orchestrated a fraudulent billing scheme, deceiving short-term payroll lending companies out of $5 million. By submitting fake invoices and using stolen identities, he falsely represented agreements with major companies.

Payroll Tax Fraud in North Carolina: A man was sentenced to 12 years in prison for failing to pay over more than $40 million in federal payroll taxes withheld from employees of his temporary staffing companies. He used the misappropriated funds for personal luxuries.

All of these instances highlight the critical need for small businesses to implement strong internal controls, security measures in payroll system security, financial controls, conduct regular audits, and ensure compliance with tax obligations. to safeguard against such fraudulent activities.

Remote and Hybrid Work

Remote and/or hybrid work also open new doors for payroll abuse, necessitating stronger data security measures, including educating employees on potential risk . Lack of in-person oversight and increased reliance on digital communication create gaps where mistakes or manipulation can slip through.

Common vulnerabilities include:

Manual data entry: Typing payroll data by hand might seem simple especially for smaller teams but it’s one of the easiest ways for errors or fraud to slip through the cracks.

Lack of two-factor authentication (2FA): If your payroll system can be accessed with just a username and strong passwords, that’s a big red flag in 2025. Without 2FA, a single compromised credential could give hackers access to sensitive employee data, direct deposit information, and more.

Outdated payroll systems without audit trails: Legacy systems that don’t track user actions or allow easy overrides without logging are a fraudster’s dream. Without a digital paper trail, it becomes nearly impossible to trace who changed what, when, and why.

Protect your business with HireLevel and isolved

Our modern payroll solutions offer built-in audit trails, secure role-based access, and fraud prevention tools designed for today’s workforce. Contact us today.

Common Types of Payroll Fraud

1. Ghost Employees: A fake employee gets added to payroll, often facilitated by disgruntled employees and someone inside the company collects their wages. This often happens in larger organizations with minimal oversight.

Example: In a large regional healthcare network, a payroll clerk created fake employee profiles over a two-year period and funneled over $150,000 to her personal bank account before being caught during an audit.

2. Timesheet Fraud: Falsifying hours worked is one of the most common payroll scams.

Example: At a manufacturing facility in the Midwest, one employee was clocking in three of his coworkers daily before they even showed up. The scam continued for nearly six months before a supervisor noticed a pattern. The company ended up losing over $25,000 in inflated payroll expenses and had to overhaul its time-tracking system.

3. Direct Deposit Fraud: Cybercriminals target payroll systems to divert paychecks to fraudulent bank account numbers.

Example: A logistics firm reported a case where an HR employee received an email seemingly from an executive requesting a change to their direct deposit information. It turned out to be a phishing email using a spoofed domain and signature. By the time it was caught, $8,500 had been deposited into a scammer’s account.

4. Misclassification of Employees
Mislabeling employees as independent contractors—either by mistake or to avoid paying benefits—can result in serious compliance headaches.

Example: A small tech startup misclassified five of their full-time developers as contractors. After a former employee filed a claim, the company was hit with penalties, back pay, and taxes totaling nearly $50,000. Even accidental misclassification can trigger audits and legal issues.

5. Expense Reimbursement Fraud: Submitting altered receipts or duplicate claims—these small, repeated actions can quickly add up.

Example: A sales manager at a regional supply chain company submitted altered meal receipts every month for over a year. When accounting finally caught on, she had pocketed more than $10,000 in fake reimbursements. This type of fraud is often uncovered only through thorough audits or new automation tools.

How AI and Automation Can Prevent Payroll Fraud

In 2025, businesses are leaning into tech for fraud prevention and adhering to data protection rules to protect their critical assets. Companies are investing in tech-forward solutions that make fraud detection faster, smarter, and more accurate.

AI anomaly detection: Advanced payroll platforms now use machine learning to flag anything that looks unusual like a sudden spike in hours worked, duplicate paychecks, or unexpected raises. These systems learn what’s “normal” for each employee or department, making it much easier to catch something off before it becomes a costly issue.

Automated Employee Record Checks: New hires are automatically validated using government databases, ID verification systems, and tax registries helping to weed out fake or duplicate employees (aka “ghosts”) from day one to prevent fraud. These tools also ensure tax documents and SSNs are accurate, reducing liability for the employer.

Pattern Recognition for Timesheet Data: Payroll fraud often hides in plain sight. Pattern recognition algorithms scan across teams and time periods to detect irregularities like identical clock-in/out times, duplicate entries, or subtle patterns in how hours are logged that might indicate collusion or buddy punching.

Biometric and Multi-Factor Authentication (MFA): Security at the access level is key. More businesses are incorporating biometric logins (like facial recognition or fingerprint scans) at employee kiosks, along with MFA for HR and payroll administrators. This dramatically reduces the risk of unauthorized system access, phishing-based account takeovers, or insider tampering.

At HireLevel, we use smart tools that work in the background 24/7 to monitor for inconsistencies—before they become problems.

Best Practices for Payroll Security

Implementing strict access controls and role-based permissions.
Conducting regular payroll audits and reconciliation.
Employee education on payroll security and fraud awareness.
Utilizing encrypted payroll processing systems.
Partnering with a payroll service provider for enhanced fraud prevention.

Regulatory Compliance & Legal Considerations

Payroll fraud isn’t just costly it’s illegal. In 2025, enforcement of wage laws and employee classification is tightening. The Department of Labor and IRS continue to increase scrutiny on misclassified workers, overtime miscalculations, and tax reporting errors.

Businesses found guilty of payroll fraud may face:

Hefty fines
Lawsuits from employees
Criminal charges for intentional misrepresentation

Staying compliant means understanding both federal and state requirements and having systems in place that support accuracy.

Conclusion: Payroll Security

Payroll fraud may be on the rise, but your business doesn’t have to be the next victim if you safeguard your financial transactions.

Be proactive. Be protected. Embrace AI-driven payroll software, train employees, educate your team, and tighten your payroll process. Also you should be limiting access to your payroll system.

Protect Your People. Protect Your Payroll

With HireLevel’s expert team and our partnership with isolved, you will keep you payroll data safe, utilizing an intelligent payroll platform built to stop fraud before it starts. By outsourcing payroll, you can focus on what you do best, growing your business.

Don’t wait for payroll fraud to become your reality.
Let HireLevel help you build a stronger, safer payroll process that protects your people and your bottom line.

HireLevel HR Resources:

Blogs: Advantages of Outsourcing Payroll Services for Small Businesses, What Is the Difference Between a Payroll Company and an Accountant?, 7 Payroll Mistakes & How to Avoid Them, How Much Does a Payroll Service Cost?

Checklist: Payroll Audit Checklist

HiNotes Webinar: How to Avoid Payroll Penalties and Ensure Compliance