Paying the people:
Diving into Payroll
If this is your first time processing payroll or you’re a seasoned veteran there are procedures that you should follow and information that you must know.
Payroll is something that ALWAYS occurs on a regular basis. Payroll is unique and different from other financial tasks you will perform. “Why?” Everyone cares about getting paid. I have not met a single person who doesn’t want to get paid. Many government rules and regulations as well as labor contracts may make payroll a complex task. Here are some practical tips and information that can help manage payroll.
Payroll has an inherent set of rules and regulations. There are federal regulations, state regulations, and labor contracts that you may need to abide by. The IRS provides three publications that will arm you with information needed to stay in compliance. They are Publication 15 (Circular E-employer’s Tax Guide), Publication 15-A (Employer’s Supplemental Tax Guide) and Publication 15-B (Employer’s Tax Guide to Fringe Benefits). It is also imperative that you know and understand Washington State payroll law. For Washington state most everything can be found at http://www.lni.wa.gov/WorkplaceRights/Wages/. Finally, make sure that you check out Washington Department of Retirement Systems website for any regulations that may be applicable to your entity.
Employees need to be classified correctly. It is important to understand the differences between exempt and nonexempt employees. When determining whether an employee is exempt or nonexempt, think about how much they’re paid, how they’re paid, and what type of work they do. These factors influence their status. See Fact Sheet #17A from the Department of Labor for the specific requirements. There is also the question of employee vs. independent contractor. This is an important designation to make and is often incorrectly done. Consider how much control is had over the individuals work. Do they perform work on their own time or do they have a set schedule from management? Be sure to review all the facts in the linked IRS fact sheet.
Prior to starting the payroll process allow adequate time for the thoughtful and non-rushed review of the payroll information received from those who are to be paid. It is important to leave sufficient time between the end of the pay period and the pay date. It is critical to not rush payroll. Mistakes happen when you’re rushed regardless of how many times you’ve processed payroll. Taking your time and reviewing work is critical to a successful payroll. I would also recommend using a calendar system to set reminders. Set reminders about processing payroll, timecard due dates, cutoff times, and quarterly reporting. This will allow you to begin the payroll process with sufficient time and make sure no task is missed. I personally use the task function in Google Calendar. Find what system works best for you and stick with it.
The payroll process starts with employees and supervisors. Ground rules must be set. There needs to be an expectation to provide information to you in an efficient manner. Set the tone early and make it clear that there are expectations that need to be met. Employees and supervisors must verify and acknowledge time information. Paper time sheets must be reviewed and signed by both employees and supervisors. Approvals are required when using an electronic method of timekeeping. All electronic timekeeping systems have an approval method. There are many options available if your current system doesn’t have an approval method.
An important part of the coordination process with employees and supervisors is to establish a clear method of communication. This will reduce miscommunication errors that slow you down. Clear communication in an email is a good method. This results in record to refer back to, print off, and file with payroll records. Maintaining payroll records that are organized allow for efficient research. FLSA regulations also require certain payroll record keeping requirements. Fact Sheet #21 from the Wage and Hour Division of the Department of Labor details this information. If your entity is audited, your life will be much easier if you have your payroll records (and all other financial records) organized. Create payroll packets for each payroll processed. These packets should include timecards, review documentation, and any other paperwork used to process payroll.
A final step before processing is to identify and make any changes. These could include changes to employee’s deductions when a new W-4 is received, retirement changes, medical plans, pay adjustments, and many other changes. It is important to document any payroll adjustments that may be needed on the current pay cycle. Always make sure you have sufficient supporting documentation for any changes being made. With payroll there will inevitably be errors. A good rule of thumb for correction from prior pay cycles is to make the correction exactly how the error occurred. Feel free to reach out to us if you would like to discuss a correction. We would be more than happy to discuss the correction and make sure it is corrected in a transparent manner.
Upon receiving approved time cards you can get to work. Total regular hours worked, overtime, sick or vacation used, and any other relevant pay items. Separate out and total each type of pay on the time card. Total both rows and columns making sure that you arrive at the correct grand total of hours worked. Also verify that overtime was appropriately paid out. Check out the FLSA guidance on overtime if you need a refresher on these rules. After verifying hours, you can begin entering the information into your payroll system. The review process can begin once data entry has been completed.
DATA ENTRY REVIEW
Before data entry is reviewed, take a break, go for a walk, or do something else to get refreshed. It is important to review data entry with a clear mind. Go through the data entry and make sure that everything is correct. Check any accruals, deductions, and any other changes made. I would also recommend that you have someone else review your payroll. Another set of eyes will be more likely to catch any errors.
If you’re responsible for payroll, keep in mind there are rules and regulations that guide payroll and be prepared to digest and apply any changes that occur. This may seem like a lot to learn but it is in your best interest to be aware as penalties can mount up quickly when mistakes are made. If you’re not sure about something, feel free to contact us, and we would be more than happy to assist you. Thanks for tuning in to the BIAS Sum It Up Blog, and be sure to check in next week.
U.S. DOL Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act
Publication 15 (Circular E-employer’s Tax Guide)
Publication 15-A (Employer’s Supplemental Tax Guide)
Publication 15-B (Employer’s Tax Guide to Fringe Benefits)
Washington State Payroll Law
U.S. DOL Fact Sheet #17A Employee Exemption Status
IRS Fact Sheet Understanding Employee vs. Independent Contractor Designation
Washington Department of Retirement Systems