Payroll procedure
/How to Process Payroll
The processing of payroll can produce errors in several places, which calls for a detailed process flow that also incorporates several controls. This procedure can be used to ensure that payroll is handled consistently on a repetitive basis. The actual process flow may vary somewhat from the steps noted below, since there may be differences related to the use of manual, computerized, or outsourced payroll processing solutions. The most likely version of the procedure, including responsibilities and basic controls, is noted below.
Step 1. Update Employee Master File
The payroll clerk receives notification of changes to employee information that impact the processing of payroll, such as withholding exemptions and pay rate changes. Update the employee master file in the payroll software with these changes.
Step 2. Set Pay Period
Verify that the payroll module is set for the correct pay period.
Step 3. Enter Time Worked
Enter the amount of regular and overtime hours worked by each employee in the payroll system. If the company manually calculates payroll, then this step and the next step are not needed. If the company uses computerized time clocks to assemble its timekeeping information, then the information may be ported directly into the payroll software.
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Step 4. Enter Manual Payments
Enter the amounts of any manual paychecks that have not yet been recorded in the payroll system. These may be pay adjustments from previous periods, or payments related to the initial hiring or the termination of employees.
Step 5. Calculate Termination Pay
Manually calculate the amount payable to any employee who has left the company, including their unused vacation time and severance pay. This usually only involves those employees who have left the company voluntarily, since forcible terminations require near-immediate payments that usually fall outside of the normal payroll processing period.
Step 6. Alter Deductions
Enter any changes to the standard deductions from employee pay, such as for medical insurance, garnishments, and charitable contributions.
Step 7. Calculate Pay
Have the software process all pay calculations for the period. If the company manually calculates pay, then use the tax tables provided by the federal and state governments to determine the proper amount of tax withholdings.
Step 8. Review Reports
If payroll calculations are either outsourced or use payroll software, print the following reports and review the underlying transactions for errors. Process payroll again until these issues have been corrected.
Negative deductions report (can indicate a data entry error or fraud)
Negative taxes report (can indicate a data entry error or fraud)
Preliminary payroll register (the key document used to locate errors)
Sorted list of wages paid (focus on excessively high or low wage amounts to spot potentially inaccurate hours worked or wage rates)
Trend line of payroll expense by department (can indicate wages being charged to the wrong department)
Step 9. Issue Payments
Once the analysis of reports indicate no further errors, process payments to employees.
Step 10. Issue Management Reports (optional)
Issue payroll reports to management that are related to the payroll just completed. Examples of such reports are a trend line of overtime by employee and a trend line of compensation expenses by department.
Step 11. Back Up Data
Once the payroll has been completed, back up the data related to it. If payroll processing is outsourced, this is handled by the supplier. If in-house software is being used, archive the data. If a manual system is used, put the payroll register in locked storage.
Step 12. Lock Down the Period
Lock down the pay period in the payroll module for the period just completed, to prevent unauthorized changes. This is essentially the same as Step 2; by locking down the pay period, we are shifting forward to the next pay period.
Step 13. Deposit Taxes
Deposit payroll taxes and verify their transmission to the government. If the company has outsourced its payroll processing, this step is handled by the supplier.
Step 14. Store Timecards
File the time cards near the payroll department. It is quite possible that employees will question their pay, in which case the most recent time cards should be easily accessible for review. After a month or two, the time cards can be shifted to longer-term storage.
Step 15. Investigate Errors
If there are payroll processing problems, be assured that employees will find them! Investigate all transaction errors encountered, and initiate changes to mitigate their continued occurrence. This may involve the alteration of procedures or the imposition of new controls.