What You’ll Learn in This Post:

Payroll audits can feel intimidating, but with the right preparation, they can be a straightforward process. In this post, we’ll walk you through why payroll audits happen in Washington State, what to expect during the process, and how J. Ott Business Solutions helps Tacoma and South Sound business owners stay compliant, organized, and ready year-round.

Washington State Payroll Audits: An Overview

In Washington State, payroll audits are conducted by agencies such as the Employment Security Department (ESD) and the Department of Labor & Industries (L&I) to ensure employers are:

• Accurately reporting wages and hours
• Classifying employees correctly
• Following state and federal labor laws

While the idea of a payroll audit can be stressful, these reviews are intended to confirm compliance. However, if issues are found, agencies may assess additional taxes, penalties, or interest—even if the errors were unintentional. The key is understanding what can trigger an audit and how to prepare for one.

What Triggers a Payroll Audit?

Payroll audits can be triggered in several ways, including:

• Inconsistent Reporting – Patterns of inconsistent wage or hour reporting.
• High-Risk Industries – Businesses in industries with a history of compliance issues.
• Changes in Ownership or Business Type – Transferring ownership or changing your business classification.
• Fraud Reports – Reports from citizens or other businesses alleging payroll violations.
• Random Selection – About 10% of audits happen through random computer selection.
• Employee Complaints – Reports of unpaid wages, overtime violations, or other concerns.
• Construction or Safety Inspections – On-site inspections where workers are present can lead to audits.

What to Expect if You’re Selected for an Audit

If your business is selected, an auditor will contact you by phone, email, or mail to:

• Explain the reason for the audit
• Provide a list of records they need to review
• Arrange a date, time, and location for the audit

During the audit, they will typically review:

Payroll and Accounting Records – Wages, hours worked, deductions, and tax filings.

Employee Classifications – Confirming whether workers are correctly identified as employees or independent contractors.

Compliance with Labor Laws – Verifying adherence to unemployment insurance laws, wage laws, and other relevant regulations.

How to Prepare for a Payroll Audit

The best approach to an audit is preparation. Here are a few steps every Washington State business owner should take:

Organize Payroll Records

Keep accurate, up-to-date payroll data, timesheets, and wage calculations in one place.

Review Employee Classifications

Make sure employees are classified correctly based on their actual job duties.

Track Subcontractor Information

Keep complete documentation for any subcontractors you use, as this can affect workers’ comp premium calculations.

Communicate and Cooperate

Respond promptly to audit requests and provide the information in the format requested.

Document Everything

Maintain thorough payroll and HR documentation year-round, including notes on unusual transactions or corrections.

Review Your Financial Statements

Do a self-review of your annual reports and payroll schedules to ensure numbers reconcile and records are complete.

Post-Audit Procedures and Penalties

Once the audit is complete, the auditor will share their findings. If adjustments are needed, you may receive a Notice and Order of Assessment (NOA) outlining any additional taxes, penalties, or interest owed.

Penalties for non-compliance can include:

• Back pay owed to employees
• Fines
• Interest on unpaid taxes
• In serious cases, even criminal charges

You have the right to challenge the findings by requesting a meeting with the audit supervisor or filing an appeal within 30 days of the report being mailed.

📌 Important: Washington State law requires employers to retain payroll records for at least three years. Employees can request copies of these records at reasonable times.
Learn more about Washington State payroll records here!

How J. Ott Business Solutions Keeps You Audit-Ready

A payroll audit is much easier when your records are already organized and accurate. That’s where we come in.

For small businesses in Tacoma and the South Sound, we provide:

• Complete payroll processing and recordkeeping
• Ongoing review of employee classifications
• Accurate workers’ comp reporting for Washington State L&I compliance
• Timely payroll tax filings and W-2 preparation
• Organized records that are ready for review at any time

By keeping your payroll clean and compliant year-round, Josh helps you avoid the stress of last-minute scrambling if you’re selected for an audit.

The Bottom Line

A payroll audit doesn’t have to be a stressful experience. With accurate records, proper classifications, and professional support, you can move through the process with confidence.

If you want your payroll to be accurate, compliant, and audit-ready, contact J. Ott Business Solutions. We help small business owners across Tacoma and the South Sound region keep payroll running smoothly—no matter what comes your way.