1. Setup new employees: W-4
  2. Collect timecard information
  3. Verify timecard information (have supervisors review)
  4. Summarize wages due (multiply wages by pay rate, account for overtime)
  5. enter employee changes (alterations to tax exemptions, pension deductions, medical deductions)
  6. calculate taxes (IRS tax tables or computerized; "taxes will vary not only by wage levels and tax allowances taken but also by the amount of wages that have already been earned for the year-to-dae"
  7. calculate applicable wage deductions (there are both voluntary (pension and medical plans, etc) and involuntary (garnishments, union dues, etc) deductions. payroll "staff must also track goal amounts for some deductions, such as loans or garnishments, in order to know when to stop making deductions when required totals have been reached")
  8. account for separate manual payments. "these may be caused by an incorrect prior paycheck, an advance, or perhaps a termination"
  9. create a payroll register
  10. verify wage and tax amounts. "conduct a final cross-check of all wage calculations and deductions. this can involve a comparison to the same amounts for prior periods, or a general check for both missing information and numbers that are clearly out of line with expectations"
  11. print paychecks. "if direct deposits are made, a remittance advice should still be printed and issued"
  12. enter payroll information in general ledger
  13. send out direct deposit notifications. "if a company arranges with a local bank to issue payments directly to employee accounts, then a notification of the accounts to which payments are to be sent and the amounts to be paid must be assembled, stored on tape or other media, and sent to the bank"
  14. deposit withheld taxes. "the employer must deposit all related payroll tax deductions and emplyoyer-matched taxes at a local bank that is authorized to handle these transactions. the IRS imposes a rigid deposit schedule and format for making deposits that must be followed in order to avoid penalties"
  15. issue paychecks. "paychecks should, at least occasionally, be handed out directly to employees, with proof of identification required; this is a useful control point in larger companiers where the payroll staff may not know each employee by name, and where there is, therefore, some risk of paychecks being created for people who no longer work for the company"
  16. issue government payroll reports. "the government requires several payroll-related reports at regular intervals..."

why outsource? save time; require less computer skilled people in payroll dept; lessen risk that payroll taxes will miss govm't deadlines

tasks taken over by outsourced payroll supplier:

payroll staff must still:

additional outsourcing features that reduce workload:

controls taken over by payroll supplier:

payroll staff must still control:


fig 1.2: controls for the outsourced payroll process

in-house computerized process


fig. 1.3 assumes the complete automation of all functions, including:

key differences between 1.3 (in-house computerized) and 1.1 (outsourced):

the purpose of reviewing uncashed checks and performing bank reconciliations is to "spot payments made to employees who are no longer with the company and who, therefore, never received the checks (which were probably issued in error). These two controls can also be added to the earlier outsourced payroll system, though some suppliers will notify a company of any uncashed checks, depending on the outsourcing arrangement"

fig 1.3 flowchart of the in-house computerized payroll process

fig 1.4 controls for the in-house computerized payroll process

before "transfer timekeeping file to payroll system": investigate missing timecard scans, obtain approval of pay changes, obtain approval of negative deductions

after "print and doublecheck preliminary payroll reports":

after "deposit withheld and matching taxes at bank":

todo: skipped page 10, and manual section of page 11,12

setting up a new employee

what forms to give a new employee (note: if HR and payroll are separate, HR usually does this)? here's some ideas:

creating the personnel file

each employee should have an associated filing folder. some ideas of what to put in it:

these files should be confidential!

change form

recommend that instead of having a zillion forms for each type of change (insurence alterations, etc), just make one change form that handles any of them

chapter 2: accumulating time worked

i read some of this but it didnt seem very relevant to me so i didn't take notes. one interesting comment it made was that you should be careful not to track time more carefully than you need to, because it either takes expensive automated system or a lot of manual labor.

chapter 3: payroll procedures and controls

to create payroll procedures, first create a flowchart. then parts of the chart are associated with index numbers, which identify procedure descriptions.

procedure descriptions should have:

example (abbreviated for my notes):


"collect and reconcile timecards (PAY-01) -> add or delete employees (PAY-02) -> alter employee deductions (PAY-03) -> process payroll transactions (PAY-04) -> issue payments to employees (PAY-05) -> archive payroll records (PAY-06)"


purpose: assemble timecards for all hourly employees, and locate and resolve timepunching errors


proc: 1. obtain timecards: obtain timecards from all company locations. check against list of locs to make sure you have a batch from ea loc 2. review timecards 2.1 add up the time on all timecards, circling time punches with no clockin or clockout. note total time on all error-free timecards and enter them into payroll system 2.2 timecards with overtime must be initialed by a manager; if they aren't, send them to the appropriate manager to get initials 3. resolve timecard discrepencies 3.1 review timecards with discrepencies with appropriate manager. tell them to guess an assumed clockin or clockout and initial them. 3.2. list total time worked at the top of these crds 3.3. enter into payroll system



1. obtain addition or deletion documentation 3.1 get add/del docs from HR. Dblcheck for correct start/stop dates, extra pay, and authorizing signatures 3.2 if anything is missing, return to sender for correction

2. update payroll database 2.1 (explanation of which menu items to use in the software) 2.2 doublecheck that the software got the correct info

3. for terminated employees, determine when their folder will be thrown out by checking the corp. document destruction policy. put this date on the folder. send the folder to the document archiving area.


proc: 1. obtain deduction info 1.1 get deduction info from HR 1.2 verify that the info on the forms is clear and that each form is auth'd by the employee

2. update payroll database 2.1 (explanation of which menu items to use in the software) 2.2 doublecheck that the software got the correct info by looking at monthly or annual totals 2.2 doublecheck that the software got the correct info by printing a report

3. File documentation


proc: 1. processing steps 1.1. review "request for time off" forms 1.2. compare requests to accrued vacation time. notify employees if they don't have enough time. process the amount of time they do have into the prayroll. 1.3. collect employee transfer requests and enter into software. 1.4. enter all manual check payments into the software 1.5. collect requests for pay changes. verify auth signatures. enter changes into software. 1.6. collect terminations. calculate final payments due, if not already paid, and enter into software 1.7. compare garnishments file to records from last payroll period see if any changes are needed, and make them if so 1.8. on friday before next payroll, clear out old records from electronic timeclocks. review current period records from timeclocks and notify employees if they have incomplete timecards. 1.9. manually enter total times from timeclocks into software 1.10. verify data entry, over and over again, until it matches 1.11. command software to process payroll. be sure to match the check number on the check stock to the check number on the computer. 1.12. use signature stamp to sign checks. stuff into envelopes, along with any special notices, and sort by dept 1.13. back up payroll database twice. one backup stored onsite, one off. 1.14. reset software to prepare for next payroll period 1.15. for any offsite locations, send payroll checks by guaranteed overnight 1.16. retrieve check register from data center and review for possible errors. file it into payroll data storage area

2. process deductions 2.1 move cafeteria plan amount from corporate checking acct to cafeteria plan acct 2.2 ditto for 401k 2.3 update the corporate life insurance payment by adjusting for current total # of employees on payroll in this period 2.4 issue check to United Way for however much they got from employee deductions 2.5 pay garnishments. verify that amounts paid out match deductions shown on the payroll summary.


1. print payroll checks 1.1 check summary to make sure amounts look right. 1.4 print a sample check and make sure it looks right. 1.5 print checks. 1.6 print deposit advices for direct deposits 1.7 print check register. 1.8 review direct deposits, and export the file

2. send direct deposits 2.1 send direct deposits to bank 2.2 verify that they got it and report no errors

3. distribute payment notifications 3.1 have all checks signed by authorized signer 3.2 stuff al paychecks and deposit advices into envelopes 3.3 batch envelopes by supervisor and deliver to supervisors, who will deliver them to employees


1. Index payroll records 1.1 fetch the personnel folders for inactive employees 1.2 batch old timecards 1.3 refer to corp. document destruction policy, and mark each item with its document destruction date

2. archive payroll records 1. box records by destruction date, mark each box by index number, record index number in the master index, along with the contents of each box 2. send boxes to archiving center for storage

after you writeup a procedure, ask the least experienced person in the accounting dept to read it to make sure the steps are clear and complete.

the need for control systems

this section merely makes the obvious point that you should weigh expected costs against expected gains when deciding which controls to introduce. it also notes that controls is one of those situations where an ounce of prevention is worth a pound of cure. later, it is noted that if you are thinking about eliminating a control, you should ask around to make sure no one else is using the data collected there for some other useful purpose that you are unaware of.

later, it is also noted that you should periodically review controls, and review them when something changes.

key payroll controls

some ideas for controls:

employee advances

to make sure all employee advances are eventually paid back, periodically review outstanding advances. a simple policy is to just deduct the advance from the next paycheck. require approval of advances from their immediate supervisors

payroll checks

if employees are paid solely via direct deposit, these don't apply

payroll expenses

goals: (a) avoid paying employees more than you should, (b) avoid the creation of paychecks for nonexistent employees

chapter 4: payroll best practices

todo: stopped reading on page 56, skipped to chapter 14

chapter 14: payroll related laws

i didn't see anything that i wanted to take notes on here.

chapter 15: outsourcing payroll

why outsource payroll?

(valid) reasons some organizations don't outsource

in short, small organizations should outsource; large ones can do it themselves for cheaper.

contract issues

most payroll service providers will only negotiate on price. small organizations generally can't get a discount unless the employee working with them has referred or brought in other businesses in the past.

transistion issues

creating control points

internal audit team should audit supplier about once a year:

verify that:

create a line item in your budget for payroll supplier and compare it to how much you actually spend. you can also calculate fees per employee.

meet with supplier once a year.

don't screw up payroll or employees will be very very unhappy!

if you switch providers or switch to in-house, you probably want to switch at year-end, because otherwise the supplier may not want to issue W-2 forms at all, or may not want to issue them for the whole year, and you may end up having to compute W-2 forms for all of the year or for the remainder of the year.

Appendix A

Internet payroll processors

informational sites

payroll orgs

payroll-related laws

traditional payroll services

chapter 16: international payroll issues

this chapter talks about when you send a U.S. citizen employee to live in another country while working for you. this situation isn't relevant for me so i didn't read it.

chapter 17: setting up the payroll department

from scratch

1. obtain a federal EIN. you probably want to get an instant EIN b/c if you mail in form SS-4 you might not get it in time for the first payroll 2. obtain state employer numbers (in some states, you might also need separate state unemployment id #s) 3. figure out the new employer tax rate for the state unemployment tax ( might have it) 4, setup a payroll bank account (not necessary, and certainly not necessary if payroll is outsourced) 5. create a permanent payroll file (for taxpayer ID #s and the like). You need a separate folder for this b/c most payroll and accounting stuff is temporary and is periodically thrown out, and you don't want this to be thrown out. store in a locked file cabinet and mark "permanent file -- do not archive or throw out" 6. set up a timecard system. don't initially use a computerized one b/c these may take a few weeks to set up, and then you might miss the first payroll 7. flowchart the system 8. create a Gantt chart for system development 9. create procedures for processing the payroll, including timecard processing, taxes, deductions, printing and distributing paychecks. after you make them, have at least one other person walk through the procedure to see if you made a mistake or forgotten anything. it's important that this procedure is done right the first time! 10. create a tax remittance deadline calendar (if not outsourcing). note times when state and federal taxes, dates when W-2s and 1099s must be sent to employers and suppliers, filing date for the annual 940 or 940-EZ, and the quarterly 941, and unemployment and income tax forms for state governments. 11. create a database backup system (if not outsourced)

that's all you really have to setup before the first payroll. now you have some breathing room.

12. create payroll policies and additional procedures. e.g. record archiving, changing deduction amounts, changing employee payroll data, updating payroll forms. 13. create employee files 14. create payroll deductions. recommend not doing this for the first payroll cycle or two b/c your hands will be full. you can have greater deductions later after you get the initial bugs ironed out to make up for lost time. however, if a garnishment order arrives, you must implement it immediately 15. accrue sick and vacation time. again, recommend not doing this for the first cycle or two 16. create employee manual. ideas of stuff to put in: when time sheets are due, vacation and sick time, when the payroll week ends, business hours, employment classification, handling of severance pay, how errors in pay are dealt with. you should probably consult with a labor lawyer or local employers' trade assoc to flesh it out. employees should sign a receipt when they have received and read the manual. 17. establish performance metrics, e.g. time taken to complete a payroll, number of payroll transaction errors, total department cost per company employee 18. if more management reports are needed beyond what your software provides, create them. ideas: names of ppl not yet using direct deposit; types and number of payroll transaction errors in each payroll cycle. 19. create a dept budget 20. schedule an internal auditor controls review (or, if no internal audit dept, use independent CPAs)

collecting employee information

1. required data: social security #, tax witholding info, marital status, name, address. just issue a W-4 to each employee. you also need the salary or wage rate. 2. which dept each employee is in 3. deduction data (don't need to do this in first cycle) 4. direct deposit data (don't need to do this in first cycle) 5. equal opportunity data (sex, ethnic backgroud) (don't need to do this in first cycle) 6. key employee dates. hire date, last pay change date (don't need to do this in first cycle). if 401k plan, then need to collect birthday and hire date prior to plan start date.


"the payroll deptartment is an extremely regimented place, where activities are driven by the timing of payroll cycles and tax remittance dates."


put version #s on data files

put govmt corp ids in a separate file folder so it isnt thrown out with temporal info