SOC 1 vs SOC 2: What Payroll and HR Teams Actually Need to Know
If you manage payroll, HR systems, or anything involving sensitive employee data, you have likely heard vendors toss around terms like SOC 1 and SOC 2. Maybe an auditor has even asked if you have got the latest reports on file. But unless you're steeped in compliance work, it's not always clear what these reports mean, or why they matter to you.
Let’s fix that.
This article breaks down the difference between SOC 1 and SOC 2 in plain English, with a sharp focus on what payroll, HR, and compliance professionals need to know.
What Is a SOC Report?
SOC stands for System and Organisation Controls. These reports are independent audits that assess how well a service provider manages things like:
internal controls,
data privacy and security,
and financial reporting integrity.
SOC reports are not just about IT infrastructure. They are increasingly a must-have for vendors that provide payroll, HR, time tracking, or any system tied to financial reporting or employee data.
SOC 1: Financial Control Is the Focus
SOC 1 reports focus on controls that impact your financial reporting. If a system feeds into your general ledger, like payroll, SOC 1 is what you care about.
Here’s why it matters: if you outsource payroll, and that vendor miscalculates compensation, that error could flow into your financial statements. SOC 1 gives you assurance that the controls your vendor has in place are designed to prevent that.
Two types:
Type I: Describes the control design at a single point in time
Type II: Tests whether the controls actually worked over a defined period
Best practice: Always ask for a SOC 1 Type II report from your payroll provider. It’s what most auditors want to see.
SOC 2: It’s All About Data Protection
SOC 2 is less about dollars and more about data. It assesses whether your vendor has proper controls around security, privacy, and availability.
Think of it as your peace of mind that:
employee data is encrypted and stored securely,
systems are monitored for unauthorised access,
and backups exist and disaster recovery plans are in place.
SOC 2 is based on five trust principles:
Security
Availability
Processing Integrity
Confidentiality
Privacy
If your HR or payroll data is in the cloud, you want your vendor to have a current SOC 2 report.
SOC 1 vs SOC 2 At A Glance
| Feature | SOC 1 | SOC 2 |
|---|---|---|
| Purpose | Financial reporting controls | Security, privacy, and data handling |
| Who uses it? | Auditors, finance, SOX teams | Risk managers, IT, legal, compliance |
| Covers | Payroll accuracy, GL integrity | Cloud security, data protection, privacy |
| SOX relevance | Required for systems impacting ICFR* | Useful, but not a SOX-specific requirement |
*ICFR = Internal Control over Financial Reporting
Why Payroll and HR Teams Should Care
Because your team is often the one using the systems, relying on the vendors, and answering the auditor’s questions.
SOC reports help you:
evaluate whether your vendor is up to standard,
demonstrate due diligence during audits,
mitigate risk when outsourcing core functions,
as well as understand where your responsibilities end and where vendor responsibilities begin.
And let’s be honest: no one wants to be caught off guard when an auditor asks, “Do you have a copy of your payroll provider’s SOC 1 Type II?”
Red Flags to Watch For
If a vendor says:
“We don’t need a SOC report”
“We’re working on getting one… eventually”
“Trust us, our system is secure”
...it’s time to dig deeper.
In today’s compliance environment, no SOC report means no deal for many organisations, especially those subject to SOX, GDPR, or HIPAA.
Final Thought: Don’t Just Trust. Verify.
SOC reports aren’t just paperwork. They are a key part of managing third-party risk. They offer independent, objective assurance that the systems you rely on for payroll, HR, and finance are safe, sound, and well-controlled.
So the next time a vendor claims to be “compliant,” ask for the proof. Ask for their SOC 1 and SOC 2.
And read them.