|
|
Payroll Service Bureaus
Payroll Internal Controls
Checklist
According to Price Waterhouse's booklet, Effective Internal
Accounting Control for Nonprofit Organizations: A Guide for
Directors and Management, the objective of internal controls
for payroll are to ensure that payroll disbursements are made only
upon proper authorization to bona fide employees, that payroll
disbursements are properly recorded and that related legal
requirements (such as payroll tax deposits) are complied with.
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. A personnel manual should
describe the organization's policies, established by the board,
regarding vacations, holidays and sick leave. Records should be
kept for each employee to ensure that these policies are being
followed. Accountants recommend that the organization retains
these records for six to seven years after the employee has been
terminated (and possibly longer if that employee participates in a
pension plan.)
The time sheet is the most common tool used to document employee
hours (including overtime) and authorize payments to employees.
Time sheets can be designed to incorporate information regarding
vacation, sick leave, and holidays. Government funders often
require time sheets to document employee effort for their grants
or contracts and all other duties they perform. 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.
Payroll checks should be written in keeping with the procedures
for all other cash disbursements (see Financial Management FAQ
#21, What Internal Controls are Needed for Cash Disbursements?).
Additional segregation of duties related to the payroll function
include having someone other than the payroll check signer:
- Hold unclaimed paychecks.
- Review the payroll register and post payroll to the general
ledger.
- Review payroll-related tax withholding, deposits, and
reporting. This is an especially important function for the
board, since board members may have personal liability for
payroll taxes that have not been properly deposited with the
appropriate government agencies.
- Distribute year-end tax summaries (W-2 s) to employees and
responding to inquiries regarding W-2 s.
- Many organizations choose to have a separate checking
account for payroll that is used for issuing paychecks and
paying government withholding and other taxes related to
payroll. A payroll register, listing who was paid, how much,
withholding amount, and check number is maintained, either as a
subsidiary journal if there is a separate payroll account, or
as part of the cash disbursements journal when payroll is
integrated with other cash disbursements in a manual system.
Some organizations require that employees sign the employee
register to acknowledge receipt of their paycheck.
Payroll Service Bureaus
Because of the number of transactions involved with the payroll
function, many nonprofits choose to take advantage of the many
low-cost payroll service bureaus available to manage payroll
activities. These services bureaus prepare payroll checks for
salaried and hourly employees, quarterly reports of payroll, FICA
and Medicaid liabilities and withholding, and year end W-2 and W-3
reports of annual salaries. In addition, you may choose to have
them deposit taxes with the appropriate government agencies. Since
payroll service bureaus offer a range of services, from advising
on payroll issues to providing the full range of payroll
activities, you can select those services you need and can afford.
Payroll service bureaus are able to offer their services
relatively inexpensively due to the large number of clients they
have. Even nonprofits with under five employees may find it
worthwhile to have the significant paperwork and attention to
regulations associated with the payroll functions handled by these
specialized professionals.
It is important to note, however, that your organization retains
final responsibility for accurate and timely reporting and
depositing of taxes when using a service bureau. Therefore, it is
important to review each payroll check and report. However, the
service bureaus also have some liability, and will work with you
to resolve any problems with government agencies resulting from
incorrect or late filing and deposits due to their error. Errors
are not uncommon with payroll services, and they do take staff
time and attention to resolve. In addition, a payroll service
bureau cannot perform the internal control functions related to
time sheets and reviewing payroll records. However, many
nonprofits with limited staff time find that using a service
bureau saves time and reduces errors, late fees, and late night
worries about IRS confrontations.
Payroll Internal Controls
Checklist
The following questions reflect common internal accounting
controls related to payroll. You may wish to use this list to
review your own internal accounting controls and determine which
areas require further action.
- Are detailed time sheets required to document employee
hours, including overtime?
- Are time sheets signed by the employee s immediate
supervisor authorizing payment for work?
- Are employment records maintained for each employee that
detail wage rates, benefits, taxes withheld each pay period,
and any changes in employment status?
- Are payroll-related taxes (federal income tax, state income
tax, employee and employer share of social security, and other
taxes) withheld and paid to federal and state agencies on a
timely basis?
- Do the executive director and board treasurer review all
the payroll tax returns?
- Do written policies and procedures exist for accounting for
vacations, holidays, sick leave, and other benefits?
- Is a list of all payroll checks written, with appropriate
withheld taxes, maintained either through the cash disbursement
journal or a separate payroll register?
- Is a separate payroll bank account maintained?
Return to the List of FAQs
|
  |
|
|
|
