Payroll plays a major role in a company for several reasons. From an accounting point of view, payroll is crucial because payroll and payroll taxes considerably affect the net income of most companies, and they are subject to laws and regulations. The primary mission of the payroll department is to ensure that all employees are paid accurately and timely with the correct withholdings and deductions, and to ensure the withholdings and deductions are remitted in a timely manner.
Because of the self-policing nature of the accounts and the regulatory restrictions of the Internal Revenue Service and the Department of Labor, controls over payroll are normally stronger than in other areas (Louwers, Ramsay, Sinason, & & Strawser, 2007). The four elements of a payroll internal control system are personnel, supervision, timekeeping, and record keeping. The personnel or human resources department should have authority to add new employees to the payroll and delete terminated employees.
Each employee should have a payroll/personnel file, containing updated salary, benefits, employment status, and withholding information as well as beginning date of employment and termination date, when applicable (Labyrinth, Inc, 2011). Terminated employees should have exit interviews so that the personnel department can remove them from payroll. Final checks and W-2s should be mailed to the employee’s home (Louwers, Ramsay, Sinason, & & Strawser, 2007). Supervisors should approve any overtime.
The immediate supervisor should approve number of hours worked, job number, absences, and time off permitted for emergencies. Finally, supervisors compare production plans and budget reports to employee costs for discrepancies (Louwers, Ramsay, Sinason, & & Strawser, 2007). The time sheet is the most common tool used to document employee hours and authorize payments to employees. These sheets include information concerning vacation, sick leave, and holidays.
Time sheets are usually submitted by the employee to his or her immediate supervisor for signature, and may also be reviewed periodically by senior management. Ideally, the person authorizing an employee’s hours does not also prepare the paychecks (Labyrinth, Inc, 2011). Payroll should prepare individual paychecks, pay envelopes, or electronic transfers using rate and deduction information supplied by the personnel function and base data supplied by the timekeeping–supervision functions.
Maintains individual year-to-date earnings records and prepares the state and federal tax reports (income tax and Social Security withholding, unemployment tax reports, and annual W-2 forms). The payroll tax returns and the annual W-2 report should correspond to company records. Most company employees responsible for these reports are reluctant to manipulate them because they fall under federal tax laws (Louwers, Ramsay, Sinason, ; ; Strawser, 2007). Persons in charge of the hiring, supervision, and timekeeping functions should not also prepare the payroll.
They could be tempted to obtain checks for fictitious or terminated employees. Duties should be adequately segregated; meaning, payroll should be approved by someone other than the person responsible for inputting the information. Also, someone other than the person who inputs or authorizes payroll should distribute the payroll checks. A person independent of input and authorization responsibilities should review labor distribution reports monthly. This review should be documented via initials.
Labyrinth, Inc. (2011). Retrieved February 06, 2011, from Payroll Internal Control Checklist: http://www.labyrinthinc.com/SharedContent/SingleFaq.asp?faqid=54 Louwers, T. J., Ramsay, R. J., Sinason, D. H., ; ; Strawser, J. R. (2007). Auditing and Assurance Services (2nd Edition ed.). New York: McGraw-Hill Companies, Inc.