Overview of the General Payroll Process

1. Set up new employees. New employees must fill out payroll-specific information as part of the hiring process, such as the W-4 form and medical insurance forms that may require payroll deductions. Copies of this information should be set aside in the payroll department in anticipation of its inclusion in the next payroll.

2. Collect time card information. Salaried employees require no change in wages paid for each payroll, but an employer must collect and interpret information about hours worked for nonexempt employees. This may involve having employees scan a badge through a computerized time clock, punch a card in a stamp clock, or manually fill out a time sheet (see Chapter 2, "Accumulating Time Worked").

3. Verify time card information. Whatever the type of data collection system used in the previous step, the payroll staff must summarize this information and verify that employees have recorded the correct amount of time. This typically involves having supervisors review the information after it has been summarized, though more advanced computerized timekeeping systems can perform most of these tasks automatically.

4. Summarize wages due. This generally is a straightforward process of multiplying the number of hours worked by an employee's standard wage rate. That said, it can be complicated by overtime wages, shift differentials, bonuses, or the presence of a wage change partway through the reporting period (see Chapter 5, "Compensation").

5. Enter employee changes. Employees may ask to have changes made to their paychecks, typically in the form of alterations to the number of tax exemptions allowed, pension deductions, or medical deductions. Much of this information must be recorded for payroll processing purposes, since it may alter the amount of taxes or other types of deductions (see Chapter 8, "Payroll Deductions").

   TIPS & TECHNIQUES

   Compiling time cards, determining who earned overtime hours, and gathering supervisory approval of those hours is a common last-minute rush job prior to completing the payroll. One of the major payroll bottlenecks is locating supervisors, who have other things to do than approve overtime hours. One alternative is to skip the supervisory approval and instead report back to supervisors after the fact, so they can see the hours charged on a trend line of multiple pay periods. If there are employees who continually record an excessive amount of overtime, this information becomes abundantly clear in the report. Supervisors can then use this information to work with specific repeat offenders, possibly issuing a blanket order never to work overtime. A sample of this report is shown in Exhibit 1.1, which lists overtime hours worked for the past six months for a group of employees. Note that the hours of Mr. Grammatic clearly exceed those of the other employees, making him a target for supervisory action. Also, overtime hours tend to be similar for people working in the same area; notice in the report how everyone except Mr. Grammatic works roughly the same amount of overtime in the same periods. Clearly, there is a potential overtime problem highlighted by the report that requires further investigation.

   Name	Jan	Feb	Mar	Apr	May	Jun
   Ashford, Mary	0	14.5	0	0	11.5	0
   Grammatic, John	13.5	28.2	20.5	29.0	31.5	29.0
   Lepsos, Harry	0	18.0	0	0	12.0	0
   Morway, Alice	0	20.0	0	0	15.2	0
   Zephyr, Horace	0	10.9	0	0	10.5	0

   
   Exhibit 1.1: Overtime Trend Report

6. Calculate applicable taxes. The payroll staff must either use IRS-supplied tax tables to manually calculate tax withholdings or have a computerized system or a supplier determine this information. 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-date (see Chapter 7, "Payroll Taxes and Remittances").

7. Calculate applicable wage deductions. There are both voluntary and involuntary deductions. Voluntary deductions include payments into pension and medical plans; involuntary ones include garnishments and union dues. These can be made in regular amounts for each paycheck, once a month, in arrears, or prospectively. The 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 (see Chapter 8, "Payroll Deductions").

8. Account for separate manual payments. Inevitably there will be cases where the payroll staff has issued manual paychecks to employees between payrolls. This may have been done to rectify an incorrect prior paycheck; for an advance; or perhaps because of a termination. Whatever the reason, the amount of each manual check should be included in the regular payroll, at least so that it can be included in the formal payroll register for reporting purposes, and sometimes to ensure that the proper amount of employer-specific taxes are withheld to accompany the amounts deducted for the employee.

9. Create payroll register. Summarize the wage and deduction information for each employee on a payroll register; this can then be used to compile a journal entry for inclusion in the general ledger, to prepare tax reports, and for general research purposes. This document is always prepared automatically by payroll suppliers or by in-house computerized systems.

10. 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.

11. Print paychecks. Print paychecks, either manually on individual checks or, much more commonly, on a computer printer, using a standard format that itemizes all wage calculations and deductions on the remittance advice. Even when direct deposits are made, a remittance advice should be printed and issued.

12. Enter payroll information in the general ledger. Use the information in the payroll register to compile a journal entry that transfers the payroll expense, all deductions, and the reduction in cash to the general ledger.

13. Send out direct deposit notifications. If a company arranges with a local bank to issue payments directly to employee accounts, 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 (see Chapter 9, "Payments to Employees").

14. Deposit withheld taxes. The employer must deposit all related payroll tax deductions and employer-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 (see Chapter 7, "Payroll Taxes and Remittances").

15. 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 companies 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 (see Chapter 9, "Payments to Employees").

    TIPS & TECHNIQUES

    The control point for periodically handing out paychecks only to those who can prove their identity is not entirely useful when many employees use direct deposit, and therefore do not care if they receive an accompanying remittance advice or not. This is an especially galling problem for companies that may have many locations or that have employees who travel constantly. In both of these cases, a physical identity check is not a viable control. An alternative control is to periodically issue lists of paycheck recipients to department managers so they can see if any names on the lists are not those of current employees. But this is a weaker control, because the department managers may not take the time to verify this information. A backup control is to compare paycheck information to other information that is independently maintained for current employees, such as free life insurance that all employees sign up for when hired. A false employee name in the payroll register will not appear on a corresponding list of benefits, indicating a potential control problem.

16. Issue government payroll reports. The government requires several payroll-related reports at regular intervals, which require information on the payroll register to complete.