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.

What is payroll accounting?

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.

Definition: Payroll accounting

Payroll accounting is the recording, settlement and posting of company wages and salaries. It is a key part of the company’s accounts and is mandatory for the majority of all companies. Payroll accountants need extensive knowledge in the fields of labor law, payroll tax law and social security law.

Payroll accounting: Their key tasks

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?

Creating and maintaining employee payroll accounts.

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.

Note

The following retention periods apply to payroll accounting:

3 years: Hiring papers, 1-9 documents, time-cards, employee handbooks, FMLA Leave details, termination documents, information pertaining to raises or changes in employee pay.

4 years: Pay slips, W-4 and other tax documents.

6 years: Retirement and 401k contribution information.

Be sure to check with your state authorities for any additional or changes to the retention periods.

Registering and deregistering employees for social security

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.

Reporting obligations during employment

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.

Reporting obligations at the end of employment

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.

Note

When an employee is deregistered with the tax authorities, the company is no longer classified as their main employer. Once this has happened, the new employer can become registered as the primary employer and receive information from the EFTPS database.

End of year payroll accounting obligations

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.

When is payroll accounting necessary?

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: Is it worth doing yourself or should you outsource it?

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.

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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:

Tips for internal payroll accounting Tips for external payroll accounting
Make use of specialist resources and attend regular training courses You can select your service provider based on the recommendation of other experienced business owners
Inexperienced/unqualified accounts staff should complete a beginner’s guide to payroll accounting course Be sure to answer any queries in a timely manner
Be sure to provide statements to different authorities, bodies and health insurance agencies in writing Use the external payroll departments checklists/questionnaires
When in doubt, go for the highest possible levy – better to reimburse than have to make greater deductions later. When in doubt, go for the highest possible levy – better to reimburse than have to make greater deductions later.
Be sure to update your software regularly Only conduct written correspondence (for proof later, if necessary)
Regularly review and update employee payroll accounts Regularly conduct feedback interviews

Click here for important legal disclaimers.

 


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