- Setup new employees: W-4
- Collect timecard information
- Verify timecard information (have supervisors review)
- Summarize wages due (multiply wages by pay rate, account for overtime)
- enter employee changes (alterations to tax exemptions, pension deductions, medical deductions)
- calculate taxes (IRS tax tables or computerized; "taxes will vary not only by wage levels and tax allowances taken but also by the amount of wages that have already been earned for the year-to-dae"
- calculate applicable wage deductions (there are both voluntary (pension and medical plans, etc) and involuntary (garnishments, union dues, etc) deductions. payroll "staff must also track goal amounts for some deductions, such as loans or garnishments, in order to know when to stop making deductions when required totals have been reached")
- account for separate manual payments. "these may be caused by an incorrect prior paycheck, an advance, or perhaps a termination"
- create a payroll register
- verify wage and tax amounts. "conduct a final cross-check of all wage calculations and deductions. this can involve a comparison to the same amounts for prior periods, or a general check for both missing information and numbers that are clearly out of line with expectations"
- print paychecks. "if direct deposits are made, a remittance advice should still be printed and issued"
- enter payroll information in general ledger
- send out direct deposit notifications. "if a company arranges with a local bank to issue payments directly to employee accounts, then a notification of the accounts to which payments are to be sent and the amounts to be paid must be assembled, stored on tape or other media, and sent to the bank"
- deposit withheld taxes. "the employer must deposit all related payroll tax deductions and emplyoyer-matched taxes at a local bank that is authorized to handle these transactions. the IRS imposes a rigid deposit schedule and format for making deposits that must be followed in order to avoid penalties"
- issue paychecks. "paychecks should, at least occasionally, be handed out directly to employees, with proof of identification required; this is a useful control point in larger companiers where the payroll staff may not know each employee by name, and where there is, therefore, some risk of paychecks being created for people who no longer work for the company"
- issue government payroll reports. "the government requires several payroll-related reports at regular intervals..."
why outsource? save time; require less computer skilled people in payroll dept; lessen risk that payroll taxes will miss govm't deadlines
tasks taken over by outsourced payroll supplier:
- processing payroll transactions
- printing payroll reports and paychecks
- making tax deposits and reports to the government on behalf of the company
payroll staff must still:
- compile and verify timesheets
- load info into payroll supplier's system
- verifying accuracy of results
additional outsourcing features that reduce workload:
- "computerized timekeeping system that prevents unauthorized overtime and automaticlly issues reports that highlight hours that were not logged in by employees" (eliminates two steps from data collection
- use computerized link with payroll supplier so you dont have to do data-entry
- "pay the supplier to create cusomized summary-level reports that can be used as the foundation for journal entries..."
- "...some suppliers now issue payroll reports on compact disc, which nearly eliminates the filing chore"
controls taken over by payroll supplier:
- check stock
- signature plates
payroll staff must still control:
- approval for overtime hours
- negative deductions
- "for larger companies with many employees, one should also compare the addresses on the employee paychecks to see if a fake employee has been added to the system, with the check being mailed to a curren employee's address to be cashed by that person. One can also issue a list of people receiveing paychecks to the department supervisors to see if any fake names or the names of departed employees crop up. finatlly, fake employees can also be spotted by handing out checks directly to employees and having them show some form of identification... though not all of these controls are necessary"
fig. 1.1: FLOWCHART OF THE OUTSOURCED PAYROLL PROCESS (almost a quote)
- review hours from timekeeping system, notify employees about missing hours, obtain supervisory approval of overtime hours worked
- collect manual paycheck info, collect employee change forms
- enter hours and payroll changes into supplier's system, file change forms in employee folders, file time cards separately
- verify totals with supplier or onlyne
- receive paychecks and reports from supplier. are they OK? if no, go back two steps
- create and post journal entries for payroll transactions
- file payroll reports
- distribute paychecks
fig 1.2: controls for the outsourced payroll process
- review hours from timekeeping system, obtain approval of overtime hours worked
- collect employee change forms, obtain approval of pay changes, obtain approval of negative deductions
- enter hours and changes into supplier's system, verify totals with suppier or online
- receive paychecks and reports from supplier, check them
- compare addresses on employee paychecks, issue paychecks list to dept. supers
- issue checks directly to recipients
in-house computerized process
involves:
- "review and verification of hours worked and other changes as entered by the employees"
- "processing and printing of payroll reports"
- "filing of direct deposit information and payroll taxes"
- "distribution of paychecks"
fig. 1.3 assumes the complete automation of all functions, including:
- computerized timekeeping system that authenticates employee and only allows them to clock-in when they are scheduled to (authorized to), and that connects to the payroll software automatically
- frontend for employees to make their own deductions and address changes (payroll staff still must review these, tho)
key differences between 1.3 (in-house computerized) and 1.1 (outsourced):
- who files the tax returns
- includes quarterly federal tax return, annual federal unemployment tax return, annual W-2 forms to employees, plus state reports
- who creates the direct deposit request computer file to send to bank
- backup and storage of payroll database
- who does tax deposits
- "summarize all tax deposits, fill out remittance forms, and file payments with the federal and state goverments at regular intervals"
the purpose of reviewing uncashed checks and performing bank reconciliations is to "spot payments made to employees who are no longer with the company and who, therefore, never received the checks (which were probably issued in error). These two controls can also be added to the earlier outsourced payroll system, though some suppliers will notify a company of any uncashed checks, depending on the outsourcing arrangement"
fig 1.3 flowchart of the in-house computerized payroll process
- investigate missing timecard scans
- review employee-entered changes
- next: transfer timekeeping file to payroll system
- process payroll on in-house software
- backup computer files
- print and doublecheck preliminary payroll reports
- file payroll reports
- send direct deposit instructions to bank
- deposit withheld and matching federal taxes at bank
- deposit withheld state income and other taxes
- distribute paychecks
- related activities
- file quarterly federal tax return
- file annual federal unemployment tax return
- issue annual W-2 forms to employees and government
fig 1.4 controls for the in-house computerized payroll process
before "transfer timekeeping file to payroll system": investigate missing timecard scans, obtain approval of pay changes, obtain approval of negative deductions
after "print and doublecheck preliminary payroll reports":
- control check stock, control signature plates, create paychecks
- compare addresses on employee paychecks
- issue paychecks list to dept supervisors
after "deposit withheld and matching taxes at bank":
- issue checks directly to recipients
- review uncashed checks
- perform bank reconciliation
todo: skipped page 10, and manual section of page 11,12
setting up a new employee
what forms to give a new employee (note: if HR and payroll are separate, HR usually does this)? here's some ideas:
- the packet should start with a check-off list that says what other documents are supposed to be in the packet
- company go-to list: who to call for phone, network issues, pension plan stuff, expense reimbursement, etc
- company phone list
- company or dept seating chart
- insurance enrollment forms
- veterans checkoff form: companies are required to submit form VETS-100 to the federal govmt once a year, which reports the proportion of vets in the workforce. this form lets you collect data for that (note: some small businesses are exempt: http://gtpac.org/2010/08/annual-eeo-and-vets-forms-submitals-required-of-employers-and-contractors/ )
- employee manual: there should also be a receipt that the new employee signs and returns to indicate they have read the manual
- pay period schedule: i.e. when the pay period ends
- form W-4
- form I-9
creating the personnel file
each employee should have an associated filing folder. some ideas of what to put in it:
- deduction information
- employee correspondence
- employee reviews (should be signed by both reviewer and employee; HR should verify that they were signed)
- garnishment info
- tax-related information (that is, W-4s)
these files should be confidential!
change form
recommend that instead of having a zillion forms for each type of change (insurence alterations, etc), just make one change form that handles any of them
chapter 2: accumulating time worked
i read some of this but it didnt seem very relevant to me so i didn't take notes. one interesting comment it made was that you should be careful not to track time more carefully than you need to, because it either takes expensive automated system or a lot of manual labor.
chapter 3: payroll procedures and controls
to create payroll procedures, first create a flowchart. then parts of the chart are associated with index numbers, which identify procedure descriptions.
procedure descriptions should have:
- index number
- page number
- date of creation
- index number of any procedure that this one replaces
- purpose of this procedure
- who (what job positions execute this procedure)
- and the procedure itself, in numbered steps
example (abbreviated for my notes):
flowchart:
"collect and reconcile timecards (PAY-01) -> add or delete employees (PAY-02) -> alter employee deductions (PAY-03) -> process payroll transactions (PAY-04) -> issue payments to employees (PAY-05) -> archive payroll records (PAY-06)"
PAY-01:
purpose: assemble timecards for all hourly employees, and locate and resolve timepunching errors
who: PR-CLERK
proc: 1. obtain timecards: obtain timecards from all company locations. check against list of locs to make sure you have a batch from ea loc 2. review timecards 2.1 add up the time on all timecards, circling time punches with no clockin or clockout. note total time on all error-free timecards and enter them into payroll system 2.2 timecards with overtime must be initialed by a manager; if they aren't, send them to the appropriate manager to get initials 3. resolve timecard discrepencies 3.1 review timecards with discrepencies with appropriate manager. tell them to guess an assumed clockin or clockout and initial them. 3.2. list total time worked at the top of these crds 3.3. enter into payroll system
PAY-02:
proc:
1. obtain addition or deletion documentation 3.1 get add/del docs from HR. Dblcheck for correct start/stop dates, extra pay, and authorizing signatures 3.2 if anything is missing, return to sender for correction
2. update payroll database 2.1 (explanation of which menu items to use in the software) 2.2 doublecheck that the software got the correct info
3. for terminated employees, determine when their folder will be thrown out by checking the corp. document destruction policy. put this date on the folder. send the folder to the document archiving area.
PAY-03:
proc: 1. obtain deduction info 1.1 get deduction info from HR 1.2 verify that the info on the forms is clear and that each form is auth'd by the employee
2. update payroll database 2.1 (explanation of which menu items to use in the software) 2.2 doublecheck that the software got the correct info by looking at monthly or annual totals 2.2 doublecheck that the software got the correct info by printing a report
3. File documentation
PAY-04:
proc: 1. processing steps 1.1. review "request for time off" forms 1.2. compare requests to accrued vacation time. notify employees if they don't have enough time. process the amount of time they do have into the prayroll. 1.3. collect employee transfer requests and enter into software. 1.4. enter all manual check payments into the software 1.5. collect requests for pay changes. verify auth signatures. enter changes into software. 1.6. collect terminations. calculate final payments due, if not already paid, and enter into software 1.7. compare garnishments file to records from last payroll period see if any changes are needed, and make them if so 1.8. on friday before next payroll, clear out old records from electronic timeclocks. review current period records from timeclocks and notify employees if they have incomplete timecards. 1.9. manually enter total times from timeclocks into software 1.10. verify data entry, over and over again, until it matches 1.11. command software to process payroll. be sure to match the check number on the check stock to the check number on the computer. 1.12. use signature stamp to sign checks. stuff into envelopes, along with any special notices, and sort by dept 1.13. back up payroll database twice. one backup stored onsite, one off. 1.14. reset software to prepare for next payroll period 1.15. for any offsite locations, send payroll checks by guaranteed overnight 1.16. retrieve check register from data center and review for possible errors. file it into payroll data storage area
2. process deductions 2.1 move cafeteria plan amount from corporate checking acct to cafeteria plan acct 2.2 ditto for 401k 2.3 update the corporate life insurance payment by adjusting for current total # of employees on payroll in this period 2.4 issue check to United Way for however much they got from employee deductions 2.5 pay garnishments. verify that amounts paid out match deductions shown on the payroll summary.
PAY-05:
1. print payroll checks 1.1 check summary to make sure amounts look right. 1.4 print a sample check and make sure it looks right. 1.5 print checks. 1.6 print deposit advices for direct deposits 1.7 print check register. 1.8 review direct deposits, and export the file
2. send direct deposits 2.1 send direct deposits to bank 2.2 verify that they got it and report no errors
3. distribute payment notifications 3.1 have all checks signed by authorized signer 3.2 stuff al paychecks and deposit advices into envelopes 3.3 batch envelopes by supervisor and deliver to supervisors, who will deliver them to employees
PAY-06:
1. Index payroll records 1.1 fetch the personnel folders for inactive employees 1.2 batch old timecards 1.3 refer to corp. document destruction policy, and mark each item with its document destruction date
2. archive payroll records 1. box records by destruction date, mark each box by index number, record index number in the master index, along with the contents of each box 2. send boxes to archiving center for storage
after you writeup a procedure, ask the least experienced person in the accounting dept to read it to make sure the steps are clear and complete.
the need for control systems
this section merely makes the obvious point that you should weigh expected costs against expected gains when deciding which controls to introduce. it also notes that controls is one of those situations where an ounce of prevention is worth a pound of cure. later, it is noted that if you are thinking about eliminating a control, you should ask around to make sure no one else is using the data collected there for some other useful purpose that you are unaware of.
later, it is also noted that you should periodically review controls, and review them when something changes.
key payroll controls
some ideas for controls:
employee advances
to make sure all employee advances are eventually paid back, periodically review outstanding advances. a simple policy is to just deduct the advance from the next paycheck. require approval of advances from their immediate supervisors
payroll checks
if employees are paid solely via direct deposit, these don't apply
- control (i.e. lock up) check stock
- add security features to check stock (i.e. microprinting, holograms, etc)
- control (lock up) signature plates
- fill in empty spaces on checks (so no one can add zeros, etc)
- mutilate voided checks
- perform bank reconcilations. compare bank statement's list of checks cashed vs. company records, to ensure that checks have not been altered before cashed, or company books were not altered. compare bank deposit records to the books, too, to see if anyone is taking cash or checks out of the batched bank deposit. also, compare records of all company bank accounts to look for check kiting. note that reconciliation must be performed with someone not associated with payroll, so that someone in payroll can't do something bad and then hide it by influencing reconciliation. you may want to do reconciliation every day since you can get records via the internet
- review uncashed checks (mb they were sent to a nonexistent employee?)
- update signature cards (i.e. deauthorize terminated people who were authorized to sign company checks)
payroll expenses
goals: (a) avoid paying employees more than you should, (b) avoid the creation of paychecks for nonexistent employees
- verify hours worked (get supervisors to initial) (also/or, use electronic time clocks; they can disallow employees to clockin/out at nonapproved times)
- require approval of overtime hours (get supervisors to initial) (also/or, use electronic time clocks; they can disallow employees to clockin/out at nonapproved times)
- require approval of all pay changes. what you're trying to prevent is collusion with a payroll clerk to pay someone too much. regularly compare pay rates paid to the approved pay rates in HR folders. require approval of a high-level manager for all pay changes. also, audit deductions (lest they be adjusted downwards), and audit amount and timing of garnishment orders
- require approval of all negative deductions
- some computer payroll systems can produce reports flagging payments to terminated employees, "the amount of payments to new employees", negative deductions, unusually high base pay or overtime
- issue checks directly to recipients. again, to prevent payroll staff from creating phantom employees, or from issuing checks to terminated employees (which they can then pocket). ensure that every paycheck is typically handed to an employee who can prove hir identity. if this is infeasible, then usually don't do it, but periodically have audit staff do this, on an unannounced basis.
- send dept supervisors lists of paychecks issued. so that they can spot if payments are being made to ppl no longer working there.
- compare the addresses on employee paychecks. again, to prevent payroll staff from pocketing others' paychecks, or phantom employee paychecks. they can get around this by sending the check to a PO box -- so you can forbid checks from being sent to PO boxes
chapter 4: payroll best practices
- disallow prepayments: advances are humane, but create a lot of workload for payroll, because payroll must: (a) manually calculate deductions, (b) manually cut a check and get it signed, (c) manually enter the advance in the computer. and if the employee leaves before repayment, the company incurs a loss. instead, "form an association with a local lending institution that specializes in short-term loadns".
- have a computer system that employees can use to change their deductions by themselves
- minimize deductions. some ways to do it: (a) eliminate the employee paid portions of some deductions, (b) eliminate certain types of benefits, (c) limit employee changes to benefit plans, e.g. allow changes only at set times a year, (d) create a benefit package for all employees with a fixed deduction amount; then let employees pick and choose what type of benefit to spend this deduction on; or just have a few types, i.e. one type for single employees, one type for families.
- prohibit deductions for employee purchases
todo: stopped reading on page 56, skipped to chapter 14
chapter 14: payroll related laws
i didn't see anything that i wanted to take notes on here.
chapter 15: outsourcing payroll
why outsource payroll?
- avoid making those tax payments (and avoid late fees when you screw it up)
- avoid paying for in-house payroll software updates (you're gonna need them every year b/c the tax tables change)
- avoid fixed costs (of in-house payroll software and labor)
- avoid nonstrategic activities
- avoid creating W-2 forms
- avoid printing paychecks
- if you don't have direct deposit setup, they do
- don't have to stuff envelopes with checks
- don't have to stamp signatures onto checks yourself
- some payroll suppliers link to a 401k plan so you dont have to move money into that yourself
(valid) reasons some organizations don't outsource
- cost: large organizations can save money by doing it themselves
- conversion problems
- last minute changes: payroll suppliers finalize things a few days early
in short, small organizations should outsource; large ones can do it themselves for cheaper.
contract issues
most payroll service providers will only negotiate on price. small organizations generally can't get a discount unless the employee working with them has referred or brought in other businesses in the past.
transistion issues
- start early
- mb add extra features separately after main part is working ok
creating control points
internal audit team should audit supplier about once a year:
verify that:
- payroll taxes are being deposited (on-time)
- 401k deductions are terminated upon reaching annual max
- garnishments are being sent to the appropriate legal authorities
- only authorized services and reports are being billed to you
- prices charged match those that you signed up for
- payroll tax deduction percentages used by the supplier are up to date
create a line item in your budget for payroll supplier and compare it to how much you actually spend. you can also calculate fees per employee.
meet with supplier once a year.
don't screw up payroll or employees will be very very unhappy!
if you switch providers or switch to in-house, you probably want to switch at year-end, because otherwise the supplier may not want to issue W-2 forms at all, or may not want to issue them for the whole year, and you may end up having to compute W-2 forms for all of the year or for the remainder of the year.
Appendix A
Internet payroll processors
- advantage payroll services www.advantagepayroll.com
- fidelity www.fidelitypayroll.com
- payroll online corp www.payrollonline.com
- payroll.com
- wells fargo www.wellsfargo.com/biz
informational sites
- CCH business.cch.com/linkexpress
- www.dol.gov
- www.irs.gov/formspub
- www.irs.gov/smallbiz/indexes
- offiec of child support enforcement www.acf.dhhs.gov/programs/cse
- www.paycheckcity.com
- www.payroll-taxes.com
- www.ssa.gov
payroll orgs
- www.americanpayroll.org american payroll assn
- www.aspm.org american soc for payroll management
- institute of payroll and pensions management www.ippm.org
payroll-related laws
- consolidadet ombnibus budget reconciliation act www.dol.gov/pwba/pubs/cobrafs
- contract work hours and safety standards act www.arnet.gov/far/current/html/Subpart_22_3
- Davis-Bacon Act www.lectlaw.com/files/emp16
- Employee Retirement income security act www.dol.gov/dol/topic/retirement/erisa
- fair labor standards act www.lectlaw.com/files/emp39.htm
- family and medical leave act www.employer-employee.com/fmla
- HIPAA www.hcfa.gov/medicaid/hipaa
- self-employment contriubtions act www.taxguide.completetax.com/text/Q15_3110.asp
- service contract act www.arnet.gov/far/current/html/Subpart_22_10
- walsh-healey public contracts act www.rbpubs.com/ls/ls27
traditional payroll services
- automatic data processing www.adp.com
- ceridian www.ceridian.com
- paychex www.paychex.com
chapter 16: international payroll issues
this chapter talks about when you send a U.S. citizen employee to live in another country while working for you. this situation isn't relevant for me so i didn't read it.
chapter 17: setting up the payroll department
from scratch
1. obtain a federal EIN. you probably want to get an instant EIN b/c if you mail in form SS-4 you might not get it in time for the first payroll 2. obtain state employer numbers (in some states, you might also need separate state unemployment id #s) 3. figure out the new employer tax rate for the state unemployment tax ( http://www.toolkit.cch.com/text/P07_1294.asp might have it) 4, setup a payroll bank account (not necessary, and certainly not necessary if payroll is outsourced) 5. create a permanent payroll file (for taxpayer ID #s and the like). You need a separate folder for this b/c most payroll and accounting stuff is temporary and is periodically thrown out, and you don't want this to be thrown out. store in a locked file cabinet and mark "permanent file -- do not archive or throw out" 6. set up a timecard system. don't initially use a computerized one b/c these may take a few weeks to set up, and then you might miss the first payroll 7. flowchart the system 8. create a Gantt chart for system development 9. create procedures for processing the payroll, including timecard processing, taxes, deductions, printing and distributing paychecks. after you make them, have at least one other person walk through the procedure to see if you made a mistake or forgotten anything. it's important that this procedure is done right the first time! 10. create a tax remittance deadline calendar (if not outsourcing). note times when state and federal taxes, dates when W-2s and 1099s must be sent to employers and suppliers, filing date for the annual 940 or 940-EZ, and the quarterly 941, and unemployment and income tax forms for state governments. 11. create a database backup system (if not outsourced)
that's all you really have to setup before the first payroll. now you have some breathing room.
12. create payroll policies and additional procedures. e.g. record archiving, changing deduction amounts, changing employee payroll data, updating payroll forms. 13. create employee files 14. create payroll deductions. recommend not doing this for the first payroll cycle or two b/c your hands will be full. you can have greater deductions later after you get the initial bugs ironed out to make up for lost time. however, if a garnishment order arrives, you must implement it immediately 15. accrue sick and vacation time. again, recommend not doing this for the first cycle or two 16. create employee manual. ideas of stuff to put in: when time sheets are due, vacation and sick time, when the payroll week ends, business hours, employment classification, handling of severance pay, how errors in pay are dealt with. you should probably consult with a labor lawyer or local employers' trade assoc to flesh it out. employees should sign a receipt when they have received and read the manual. 17. establish performance metrics, e.g. time taken to complete a payroll, number of payroll transaction errors, total department cost per company employee 18. if more management reports are needed beyond what your software provides, create them. ideas: names of ppl not yet using direct deposit; types and number of payroll transaction errors in each payroll cycle. 19. create a dept budget 20. schedule an internal auditor controls review (or, if no internal audit dept, use independent CPAs)
collecting employee information
1. required data: social security #, tax witholding info, marital status, name, address. just issue a W-4 to each employee. you also need the salary or wage rate. 2. which dept each employee is in 3. deduction data (don't need to do this in first cycle) 4. direct deposit data (don't need to do this in first cycle) 5. equal opportunity data (sex, ethnic backgroud) (don't need to do this in first cycle) 6. key employee dates. hire date, last pay change date (don't need to do this in first cycle). if 401k plan, then need to collect birthday and hire date prior to plan start date.
conclusion
"the payroll deptartment is an extremely regimented place, where activities are driven by the timing of payroll cycles and tax remittance dates."
misc
put version #s on data files
put govmt corp ids in a separate file folder so it isnt thrown out with temporal info