Payroll procedure

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, follows:

  1. Update employee master file. The payroll clerk will probably receive notification of a number of changes to employee information that impact the processing of payroll, such as withholding exemptions and pay rate changes. If so, update the employee master file in the payroll software with these changes.

  2. Set pay period. Verify that the payroll module is set for the correct pay period.

  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.

  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.

  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.

  6. Alter deductions. Enter any changes to the standard deductions from employee pay, such as for medical insurance, garnishments, and charitable contributions.

  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.

  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)

  9. Issue payments. Once the analysis of reports indicate no further errors, process payments to employees.

  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.

  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.

  12. Lock down the period. Lock down the payroll 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 payroll period, we are essentially shifting forward to the next payroll period.

  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.

  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.

  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.

Related Courses

How to Audit Payroll
Optimal Accounting for Payroll
Payroll Management