The payroll process encompasses 2 functions – accounting and human resources – and some processes from each side of it should end up in your accounting manual. All organizations should document how payroll is processed and controls to make sure the right amount is paid, and paid in a timely fashion. If your organization has multiple departments that people’s salaries can be charged to, or if you have contracts or grants from funders that you can bill salaries to, you should also write up how amounts get allocated. Here are some examples of what to include in your accounting manual:
HR functions:
- How are new hires processed and entered in the payroll system? What forms do hiring managers need to fill out, e.g. approval for hiring, documenting the new hire’s salary, and tax withholding forms?
- Who handles paperwork for signing up for, or declining, benefits, e.g. health insurance and your retirement plan?
- How do people sign up for direct deposit?
- What steps are taken when an employee resigns or is terminated, e.g. paying out unused vacation time, making sure they are terminated in the payroll system?
- How is personnel information protected, e.g. physical records being kept in a locked cabinet or digital records being encrypted and password-protected?
- Are employees expected to fill out timecards for each pay period? How are they submitted? Who reviews and approves timecards?
- Who tracks which employees are eligible for overtime pay, and how is this entered in the payroll system?
Accounting functions:
- Do you process payroll internally, or through an outside processor, like ADP or Paychex?
- How are payroll taxes submitted to the IRS and any state in which employees work?
- Which staff member is responsible for running payroll, whether writing checks or communicating the information to ADP, Paychex, etc.? Does anyone review payroll for accuracy before it’s run, e.g. the Controller or CFO?
- How frequently do you process payroll, e.g. every other week, or twice a month?
- For staff not receiving direct deposit, how are paychecks and pay stubs distributed? How do you ensure that paychecks are given to the correct person, i.e. not lost or stolen?
- Do you ever pay bonuses? If so, how are they approved, and when are they paid out?
- How are salaries documented, whether for new hires, or raises?
- How and for what reasons are salaries increased, e.g. cost of living adjustments, or raises for performance and promotions? Who approves these adjustments, and how are they documented and communicated to the staff responsible for running payroll?
- If your organization has multiple departments or programs that salaries can be charged to, how do you allocate salaries? Is this tracked on timesheets, or do you periodically review and/or estimate how each person spends their time? The same would apply if you have contract or grants from customers or funders (if you’re a non-profit) that you can charge salaries to.
- If you use a payroll processor, who reviews their SOC-1 or SOC-2 report? Do you assess the risks identified in the reports and, if necessary, develop mitigating controls?
- How are W-2s processed at the end of the year?
Check here for additional topics to cover in your accounting manual.