Fundamentals of Payroll Operations

FPC 2015Chapter 2

The Payroll System

Components Hardware- Physical Components Software- Programs Network-Communications People-Operators of the System

Computerized Systems help with these tasks:

Compliance w/Regulations and Policies

Timely & Accurate Paychecks/Direct Deposit

Periodic Reporting Record Retention Control & Security

Processing MethodsBatch or Real-time

Batch Processing Data is coded and collected Computer center processes the data

with similar jobs to be processed Generally no access to view as

processing Less expensive than real-time But not as timely as real-time

Processing MethodsBatch or Real-time

Real-Time On-line system Calculations and results automatic Immediate availability View and interact with the processing

Processing MethodsBatch or Real-time

Most companies utilize a blend of batch and real time processing for the most cost effective and efficient processing results

Employee and Manager Self–Service Availability

Employees and managers can update data to the master files online

View / Print earning statements

View/ Print W2 forms

Interfaces- Definition: The point where two distinct data

processing elements meet Example- 2 pieces of hardware; 2 pieces

of software or hardware & software.

Automated interfaces are only entered once.

Automated interfaces are more accurate and timely.

Interfaces-Most Common Payroll Interfaces:

Human Resources Benefits Data Collection- special labor costs Time and Attendance Check Reconciliation Electronic Funds Transfer General Ledger/ Cost Accounting

Integration-Ideal Processing Environment

Single integrated (shared) data base: Reduce data integrity issues Eliminates timing issues Eliminates interfacing

Interfaced or Integrated Reconciliations

Ensures the data shared between the systems is accurate.

General Ledger accounts Regular interval balancing Utilization of zero balance accounts

Reconcile 3rd Party Payments 401K, Liens, unions insurances Reconcile payments from AP or PR to ensure

compliance

Control ProceduresWhy?

Control Procedures: System Edits Balancing & Reconciliation Documentation Data Auditing & Validation Batch Controls & Correction Procedures Accumulator Totals Updating/upgrading system Security External Audits

Control ProceduresSystem Edits or Validity Checks

Alert for termed ees w/ pay New hire tracking Error if no pay for an active ee Alert for inactive ee w/ pay Alert if pay over a specific amount Alert for negative or zero pay Alert for hours over a specific amount Pay rate changes

Control ProceduresBalancing and Reconciliation

Master record of ee payments to substantiate tax returns

Payroll liability accounts reconciled to verify liability and unpaid taxes (monthly)

Liability accounts for deductions balanced to ensure accuracy for AP

Bank accounts reconciled , unclaimed wage account, stale dated payments, outstanding payments

Control ProceduresDocumentation

Ensures Uniformity Simplifies Training Provides a reference tool

Control ProceduresData Auditing and Validating

Sampling of data for verification and internal parameter control

Substantiates validity of data Promotes accuracy

Batch total verifications Correction Procedures Accumulator Totals

Control ProceduresUpdates/ Upgrades

Updates: Quarterly Year-end Tax UpdatesBe sure to back up the system prior to the update

Upgrades: More Complex New Features Process enhancementBe sure to consider this as a project

Control ProceduresSecurity

Of the utmost importance against Embezzlement Check fraud Identity theft

Control Procedures Security Guards

Job Segregation Personnel Rotation System Restrictions Internal controls for specific

functions Internal audits Independent reconciliations Employee payment verifications

Control ProceduresSecurity Guards (Cont.)

Reconcile bank accounts monthly Password levels –system accessibility Physical payouts Written procedures for undelivered

checks Procedures for processing void pays Audit trails

Control ProceduresExternal Audits

Appropriateness of financial statements

Safeguarding of financial assets Level of risks to the company

financial futures

Paying Employees

State laws dictate frequency, pay options and may dictate bank be in state ee work.

Employer’s choice to pay by: Cash Check Direct Deposit Pay Cards

Pay by Check Special zero account for payroll checks Voiding/ check cancellations need to be

processed through payroll and then notifications to other appropriate depts such as GL, tax, treasury, finance

Precautions/ security for blank checks Proper handling procedures a must

Pay by Direct DepositElectronic Funds Transfer (EFT)

Employee Advantages Immediate funds availability on payday No delay in constructive receipt of pay No bank interaction necessary

Employee Disadvantages Comfort level of payment method Lack of bank account

Pay by Direct DepositElectronic Funds Transfer (EFT)

Employer Advantages No lost checks Reduction of paper flow Eliminates early manual processing Reduction of loss potential Cost reduction No check signing Minimizes cancelled check storage Reduction of escheatment Reduction of balance and reconciliation

Pay by Direct DepositElectronic Funds Transfer (EFT)

Employer Disadvantages Not paperless Multiple pay methods Stop Payment Challenges Costs imposed by originating bank Loss of “Float” Def- Float is the time between

the writing of the paychecks and the actual withdrawal of funds to cover the paychecks.

Direct Deposit Process

Regulated by the Federal Reserve Board’s Regulation E.

NACHA’s ACH Requirements NACHA Operating Rules

State Laws

Direct Deposit Process

Three pieces of information needed: EE Bank routing number EE Bank account number Type of Account –Savings or

Checking

Prenotification-Are they optional?

Direct Deposit Process Flow Employee authorization Company set up ACH file(Automatic Clearing House) ODFI- Posts on us –>new ACH file sent RDFI Posting to account-> Descriptive

statement

Direct Deposit Corrections/ Reversals

Single entry reversals Must be corrected in 5 days Does not require employee

authorization Corrections /reversals must be

same amount as deposit on settlement date

Resolving Late Direct Deposit Verify routing and account numbers ATM may have a later posting time than

the actual bank processing time Funds should be available by 9:00 a.m.

on pay date-internal bank challenges –bank should honor based on voucher

ODFI can be contacting as resource and resolution agent

Federal Bank Holiday

Payment by Pay Card

Pay cards are solutions for the unbanked

Prepaid cards that are host based , stored value cards for the unbanked employees to obtain cash, pay bills, by a convenient and secure medium

Payment by Pay CardEmployer Benefits

Reduction of costs Enhanced efficiency Increased employee productivity

/satisfaction Employee need not have a bank

account

Payment by Pay CardEmployee Advantages

Cost savings – especially for unbanked

Independence Prestige Safety/Security Freedom Convenience Time

Payment by Pay CardEmployer Advantages

Cost reduction Enhance efficiency / productivity Legal compliance requirements

Payment by Pay CardCost Advantage

Cost reduction Check loss –theft Fraudulent checks-duplicate

payments Check printing, storage, retention,

and reconciliation Special payment and exception

payments

Payment by Pay CardEfficiency Advantage

Eliminated payroll checks Electronic pay statements Funding via ACH Administration via web- application Ease of Constructive receipt No loss of production time

Payment by Pay CardCompliance Advantage

Constructive receipt is immediate and meets many stringent timeframes imposed for payment to employees.

Payment by Pay CardStarting a Program Ensure agreement with a participating

financial institution Market offering to employees Establish a funding pool with bank Institution establishes employees

account*Card When the pool is funded the bank loads

the cards with the appropriate net amounts

Funding is via ACH or intra bank transfer Adjustments made via web application

Payment by Pay CardReversals

Specific policy & procedure to provide stop payment /reversal

Procedure steps may include Notification to bank to reverse card

payment Reissue the payment

Payment Timing Regulations

States laws govern: The method of payment Frequency of payment Time period between the end of

the pay period and pay day

Unclaimed WagesEscheatment

State laws governing the procedures for

unclaimed wages Length of time payment held Notification of held funds process Wage turnover to agency

Thank You!!

Good Luck with your FPC test!! Christine O’Hara, CPP

312-474-3221 Christine.O’Hara@IRIWorldWide.com