Payroll ac­count­ing: What are its uses?

If you want to run a suc­cess­ful company, there will be many chal­lenges to overcome. Apart from the op­er­a­tional side of things, one of the main focuses is the bu­reau­crat­ic burden which will grow ex­po­nen­tial­ly as long as your company does. Payroll ac­count­ing, for example, goes far beyond the timely pro­cess­ing of monthly salaries: Reporting re­quire­ments need to be complied with, and personnel master data must be main­tained without losing track of your employees. This is much easier said than done. There are many companies that decide to outsource payroll ac­count­ing to external service providers, and for good reason.

Payroll ac­count­ing deals with the recording, set­tle­ment and dis­tri­b­u­tion of wages and salaries, as well as employees’ statutory and voluntary de­duc­tions. The purpose of this is to calculate the salary en­ti­tle­ment (gross and net) of all employees for the period in question. Ad­di­tion­al­ly, however, the results of payroll ac­count­ing serve as the basis for the cal­cu­la­tion of payroll costs, as well as the as­so­ci­at­ed social expenses in company ac­count­ing. Ac­count­ing documents include timesheets, work time-cards and em­ploy­ment contracts.

Payroll ac­count­ing includes the following tasks:

• Main­tain­ing personnel master data
• Ful­fil­ment of statutory reporting oblig­a­tions (e.g. payroll tax de­c­la­ra­tion)
• Creation of DTA files (disk exchange method)

Each employee is assigned their own payroll account in the de­part­ment. What kind of data should be recorded is laid out in the

Fair Labor Standards Act of 1938 29 U.S.C. § 203

and is the purview of the De­part­ment of Labor, Wage and Hour Division. Small and medium-sized en­ter­pris­es often use personnel in­for­ma­tion systems (PIS) in their payroll ac­count­ing, while large companies usually use cor­re­spond­ing ERS (En­ter­prise Resource Planning) system modules.

The cost of payroll ac­count­ing doesn’t just depend on the size, but also on the kind of company. In par­tic­u­lar, the type of staff re­mu­ner­a­tion pays a major role here: If employees or workers are paid by the hour, and if overtime and working hours are paid ad­di­tion­al­ly at the weekends, this results in a lot more work for the payroll ac­count­ing de­part­ment, compared to if ex­clu­sive­ly fixed salaries were paid. The general personnel policy also affects the payroll ac­coun­tant’s workload, as frequent additions and de­par­tures in the staff requires much more bu­reau­cra­cy than a constant workforce. But what are payroll ac­count­ing’s specific tasks and re­spon­si­bil­i­ties?

As mentioned above, a separate payroll account must be created and main­tained for each employee. This account will contain general in­for­ma­tion about the person and their salary. In the case of an external payroll audit, the payroll account makes it easier for the tax au­thor­i­ties to check each person’s payroll tax de­duc­tions. The payroll account also serves as the basis for cal­cu­lat­ing different in­sur­ances. Personal and salary in­for­ma­tion should include:

• Employee’s first and last name
• Gender
• Full address
• Social security number
• Job title
• Date of payment
• Payroll period
• Hours worked
• Payment type – wages, salary, com­mis­sion, etc. (separated into cash and non-cash re­mu­ner­a­tion)
• Pay rate
• Withheld payroll taxes
• Em­ploy­er's portion/expense for Social Security taxes, Medicare taxes, state and federal un­em­ploy­ment taxes
• Net income
• Special payments (e.g. paid vacation, Christmas bonuses) taxed on a flat-rate basis
• Em­ploy­er's portion/expense of fringe benefits such as health and dental insurance, paid holidays, vacations and sick days, pension and savings plan con­tri­bu­tions, worker com­pen­sa­tion insurance, etc.
• Any lost income for more than 5 con­sec­u­tive days

In­di­vid­ual personnel account records may be kept by third parties, as long as the ac­count­ing format and pro­ce­dures used are in ac­cor­dance with the prin­ci­ples of proper ac­count­ing. Most im­por­tant­ly, the data must be kept available during the mandated retention period and should be made available to the tax office at any time in a com­pre­hen­sive form. To this end, the tax au­thor­i­ties require a certain standard whether the records be trans­ferred elec­tron­i­cal­ly or in paper form.

One of the basic payroll ac­count­ing tasks is to register new employees or dereg­is­ter old employees for social security. This is done with in­for­ma­tion provided on an employee’s W-2 Form. In order for an employee to be able to fill out their W-2 form and be reg­is­tered as an employee, they will need to provide you with their social security number, as well as their personal in­for­ma­tion. This number should be obtained by the employee at the beginning of the em­ploy­ment re­la­tion­ship or when they began working for the first time, if this is not their first job. Be sure that the number the employee has provided you with is def­i­nite­ly a social security number, and not an ITIN number. If the person does not have an SSN and only has an ITIN, there is a good chance they are not legally permitted to work in the USA and employing someone illegally can lead to many problems down the line. Check out the IRS website for more in­for­ma­tion on this topic.

For the duration of an employee’s time working at your company, payroll ac­count­ing is re­spon­si­ble for reporting and paying withheld taxes on behalf of the employee. This can be done online through EFTPS. Ad­di­tion­al­ly, the payroll de­part­ment is required to pay employee and employer social security and Medicare taxes with Form 941 and make un­em­ploy­ment con­tri­bu­tions through the 1FUTA tax by filing Form 940. A full list of due dates for filing these documents can be found here.

Re­gard­less of how the em­ploy­ment re­la­tion­ship has ended (ter­mi­na­tion, end of contract, etc.), there are certain oblig­a­tions still in place for the payroll ac­count­ing de­part­ment. They are obliged to notify tax au­thor­i­ties that the employee is no longer working there, which can also be done elec­tron­i­cal­ly through EFTPS. The employee departure must also be reported to the relevant social security, Medicare or private health insurance bodies.

All companies are obliged to carry out an annual payroll tax set­tle­ment at the end of the year. The purpose of this is to check monthly withheld payroll tax at the end of the year against the annual payroll tax table. This allows com­pen­sa­tion for dif­fer­ences that may arise when comparing annual income tax with payroll tax actually paid. This kind of dif­fer­ence may occur, for example, if the salary has changed during the year or if bonuses have been dis­trib­uted.

Payroll is also required to inform the relevant social security and Medicare bodies of their employees’ salaries, so that if con­tri­bu­tions are means tested, they can be adjusted ac­cord­ing­ly.

As soon as a company employs people, they’re au­to­mat­i­cal­ly obliged to perform payroll ac­count­ing. This is due to the no­ti­fi­ca­tion oblig­a­tions pre­vi­ous­ly mentioned to the various social security and Medicare in­sti­tu­tions, as well as tax oblig­a­tions. While there is no federal law requiring employers to issue paychecks, many states have leg­is­la­tion in place requiring this, so you will have to check with your local au­thor­i­ties and issue them ac­cord­ing­ly.

Payroll ac­count­ing re­spon­si­bil­i­ties and tasks are extensive. Even in smaller companies, these tasks involve a great amount of time and effort. In par­tic­u­lar, accuracy is very important when creating re­mu­ner­a­tion state­ments: if there are errors, the tax au­thor­i­ties as well as the social security and health insurance agencies will quickly notice, and you could face penalties. Using an external service provider will ensure that your payroll ac­count­ing needs are being met to the highest pro­fes­sion­al standards.

The main advantage of having an external payroll ac­count­ing de­part­ment is the wealth of ex­pe­ri­ence these offer, since they are usually serving a large number of clients. Error-free payroll ac­count­ing is always in their interests, so they will always strive to be up-to-date with current federal and state leg­is­la­tion. A good re­la­tion­ship between a company and their external payroll provider is important to guarantee correct payroll ac­count­ing. The following table sum­ma­rizes the measures for min­i­miz­ing risks in external and internal payroll ac­count­ing:

Click here for important legal dis­claimers.