Chapter 15
Content
C HAPTER 15
The Human Resources
Management / Payroll Cycle
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
1 of 36
INTRODUCTION
• Questions to be addressed in this chapter
include:
– What are the basic business activities and
data processing operations that are
performed in the human resources
management (HRM)/payroll cycle?
– What are the major threats and the controls
that can mitigate those threats?
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
2 of 36
INTRODUCTION
• Employees are an organization’s most valuable
assets:
– Their knowledge and skills affect quality and quantity
of goods and services.
– Labor costs are a major expense in generating
revenues and a key cost driver.
• The traditional AIS has not measured or reported
on the status of a company’s human resources:
– Financial statements do not regard employees as
assets.
– Under GAAP, the value of human services is not
measured until they have been consumed.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
3 of 36
INTRODUCTION
• The most important tasks performed in the
HRM/payroll cycle are:
– Recruiting and hiring new employees
– Training
– Job assignment
– Compensation (payroll)
– Performance evaluation
– Discharge of employees (voluntarily or
involuntarily)
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
4 of 36
INTRODUCTION
• There are five major sources of input to the
payroll system:
– HRM department provides information about
hirings, terminations, and pay-rate changes.
– Employees provide changes in discretionary
deductions (e.g., optional life insurance).
– Various departments provide data about the
actual hours worked by employees.
– Government agencies provide tax rates and
regulatory instructions.
– Insurance companies and other organizations
provide instructions for calculating and remitting
various withholdings.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
5 of 36
INTRODUCTION
• Principal outputs of the payroll system are
checks:
– Employees receive individual paychecks.
– A payroll check is sent to the bank to transfer funds
from the company’s regular account to its payroll
account.
– Checks are issued to government agencies,
insurance companies, etc., to remit employee and
employer taxes, insurance premiums, union dues,
etc.
• The payroll system also produces a variety of
reports.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
6 of 36
PAYROLL CYCLE ACTIVITIES
The five basic activities in the payroll cycle:
1.
2.
3.
4.
5.
Update payroll master data
Validate time and attendance data
Prepare payroll
Disburse payroll
Disburse taxes and miscellaneous
deductions
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
7 of 36
1. UPDATE PAYROLL MASTER FILE
• The HRM department provides information on new
hires, terminations, changes in pay rates, and
changes in discretionary withholdings.
• Appropriate edit checks, such as validity checks on
employee number and reasonableness tests are
applied to all change transactions.
• Changes must be entered in a timely manner and
reflected in the next pay period.
• Records of terminated employees should not be
deleted immediately as some year-end reports (e.g.,
W-2s) require data on compensation for all
employees during the year.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
8 of 36
1. UPDATE PAYROLL MASTER FILE
• The payroll department also receives
notification of changes in tax rates and
other payroll deductions from
government agencies, insurers,
unions, etc.
• These changes occur periodically.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
9 of 36
Update Master File Threats
1. Unauthorized changes to payroll master
data
2. Inaccurate updating of payroll master
data
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
10 of 36
Update Master File Controls
1a. Segregation of duties: HRM department
updates master data, but only payroll
department issues paychecks
1b. Access controls
2a. Data processing integrity controls
2b. Regular review of all changes to master
payroll data
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
11 of 36
2. VALIDATE TIME AND ATTENDANCE
DATA
• Some employees are paid on an hourly basis.
• Some employees earn a fixed salary, e.g.,
managers and professional staff.
• Sales staff are often paid on a straight commission
or base salary plus commission.
• Increasingly, laborers may be paid partly on
productivity.
• Some management and employees may receive
stock to motivate them to cut costs and improve
service.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
12 of 36
2. VALIDATE TIME AND ATTENDANCE
DATA
• The payroll system needs to link to the
revenue cycle and other cycles to calculate
these payments.
• It’s also important to design bonus schemes
with realistic, attainable goals that:
– Can be measured
– Are congruent with corporate objectives
– Are monitored by management for continued
appropriateness
– Are legal
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
13 of 36
2. VALIDATE TIME AND ATTENDANCE
DATA
• How can information technology help?
– Collecting time and attendance data
electronically, e.g.:
•
•
•
•
Badge readers
Electronic time clocks
Data entered on terminals
Touch-tone telephone logs
– Using edit checks to verify accuracy and
reasonableness when the data are entered.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
14 of 36
Validation Threats
1. Inaccurate time and attendance data
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
15 of 36
Validation Controls
1a. Source data automation for data capture
1b. Biometric authentication
1c. Segregation of duties (reconciliation of
job-time tickets to time cards)
1d. Supervisory review
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
16 of 36
3. PREPARE PAYROLL
• The employee’s department provides
data about hours worked.
• A supervisor confirms the data.
• Pay rate information is obtained from
the payroll master file.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
17 of 36
3. PREPARE PAYROLL
• Procedures:
– The payroll transaction file is sorted by
employee number (same sequence as master
file).
– For each transaction, the payroll master file is
read for pay rates, etc., and gross pay is
calculated.
• Hourly Employees: Gross pay = (hours worked x
wage rate) + Overtime + Bonuses
• Salaried Employees: Gross pay = annual salary x
fraction of year worked
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
18 of 36
3. PREPARE PAYROLL
– Payroll deductions are summed and
subtracted from gross pay to obtain net
pay. There are two types of deductions:
• Payroll tax withholdings
• Voluntary deductions
– Year-to-date totals for gross pay,
deductions, and net pay are calculated,
and the master file is updated. Cumulative
records are important because:
• Social Security and other deductions cease or
decline at certain levels.
• The information will be needed for tax reports.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
19 of 36
3. PREPARE PAYROLL
– The following are printed:
• Paychecks for employees--often accompanied by
an earnings statement, which lists pay detail,
current and year-to-date.
• A payroll register which lists each employee’s
gross pay, deductions, and net pay in a multicolumn format:
– Is used to authorize the transfer of funds to the
company’s payroll bank account.
– May be accompanied by a deduction register,
listing miscellaneous voluntary deductions for each
employee.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
20 of 36
Prepare Payroll Threats
1. Errors in processing payroll
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
21 of 36
Prepare Payroll Controls
1a. Data processing integrity controls: batch totals,
cross-footing of the payroll register, use of a
payroll clearing account and a zero-balance check
1b. Supervisory review of payroll register and other
reports
1c. Issuing earnings statements to employees
1d. Review of IRS guidelines to ensure proper
classification of workers as either employees or
independent contractors
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
22 of 36
4. DISBURSE PAYROLL
• Most employees are paid either by:
– Check
– Direct deposit
– In some industries, such as
construction, cash payments may still
be made, but does not provide good
documentation
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
23 of 36
4. DISBURSE PAYROLL
• Procedures:
– When paychecks have been prepared, the
payroll register is sent to accounts payable for
review and approval.
– A disbursement voucher is prepared to
authorize transfer of funds from checking to
the payroll bank account.
• For control purposes, checks should not be drawn on the
company’s regular bank account
• A separate account is created for this purpose
– Limits the company’s loss exposure
– Makes it easier to reconcile payroll and detect paycheck
forgeries
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
24 of 36
4. DISBURSE PAYROLL
– The approved disbursement voucher and payroll register are sent to the
cashier. The cashier:
• Reviews the documents.
• Prepares and signs the payroll check to transfer the funds.
• Reviews, signs, and distributes employee paychecks (which
separates authorization and recording from distribution of
checks).
• Re-deposits unclaimed checks in the company’s bank
account.
• Sends a list of these paychecks to internal audit for
investigation.
• Returns the payroll register to payroll department, where it is
filed with time cards and job time tickets.
• Sends the disbursement voucher to accounting clerk to
update general ledger.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
25 of 36
4. DISBURSE PAYROLL
• Efficiency Opportunity: Direct Deposit
– Direct deposit can improve efficiency and
reduce costs of payroll processing
• Employee receives a copy of the check and an
earnings statement
• Each bank receives a record of the payroll deposits for
that bank via EDI. The record includes:
–
–
–
–
Employee number
Social Security number
Bank account number
Net pay amount
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
26 of 36
Disburse Payroll Threats
1. Theft or fraudulent distribution of
paychecks
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
27 of 36
Disburse Payroll Controls
1a. Restriction of physical access to blank payroll checks and
the check signature machine
1b. Restriction of access to the EFT system
1c. Prenumbering and periodically accounting for all payroll
checks and review of all EFT direct deposit transactions
1d. Require proper supporting documentation for all paychecks
1e. Use of a separate checking account for payroll, maintained
as an imprest fund
1f. Segregation of duties (cashier versus accounts payable;
check distribution from hiring/firing; independent
reconciliation of the payroll checking account)
1g. Restriction of access to payroll master database
1h. Verification of identity of all employees receiving paychecks
1i. Re-depositing unclaimed paychecks and investigating cause
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
28 of 36
5. DISBURSE PAYROLL TAXES AND
MISCELLANEOUS DEDUCTIONS
• The employer pays some payroll taxes
and employee benefits directly
– The employer withholds federal and state
taxes from employee paycheck, along with
Medicare tax, and the employee’s share of
Social Security.
– May also withhold voluntary deductions such
as union dues, United Way contributions,
credit union savings, retirement contributions,
etc.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
29 of 36
5. DISBURSE PAYROLL TAXES AND
MISCELLANEOUS DEDUCTIONS
• In addition, the employer pays:
– A matching amount of Social Security
– Federal and state unemployment taxes
– The employer share of health, disability, and
life insurance premiums, as well as pension
contributions
• Some companies offer flexible benefit
plans, sometimes called cafeteria-style
benefit plans.
– These plans offer a menu of options.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
30 of 36
5. DISBURSE PAYROLL TAXES AND
MISCELLANEOUS DEDUCTIONS
• The company must periodically prepare
checks or EFT to pay tax and other
liabilities.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
31 of 36
Disburse Taxes and Deduction Threats
1. Failure to make required payments
2. Untimely payments
3. Inaccurate payments
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
32 of 36
Disburse Taxes and Deductions Controls
1 and 2. Configuration of system to make
required payments using current
instructions from IRS (Publication Circular
E)
3a. Processing integrity controls
3b. Supervisory review of reports
3c. Employee review of earnings statement
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
33 of 36
OUTSOURCING OPTIONS
• Many entities outsource payroll and HRM
to:
– Payroll service bureaus
• Maintain the payroll master file and perform payroll
processing activities
– Professional employer organizations (PEOs)
• Perform the services of the payroll service bureau
• Also administer and design employee benefit plans
• Generally more expensive than payroll service
bureaus
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
34 of 36
OUTSOURCING OPTIONS
• When organizations outsource payroll
processing, they send the service bureau
or PEO at the end of each period:
– Personnel changes
– Employee time and attendance data
• The service bureau or PEO then:
– Prepares paychecks, earnings statements,
and a payroll register
– Periodically produces tax documents
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
35 of 36
OUTSOURCING OPTIONS
• Outsourcing is especially attractive to small and
mid-size businesses because:
– It’s often cheaper for smaller companies
– The bureau or PEO may provide a wider range of
benefits
– It frees up the company’s computer resources for
other areas
• However, companies must carefully monitor
service quality to ensure that these systems
integrate HRM and payroll data in a manner that
supports effective management of employees.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
36 of 36
The Human Resources
Management / Payroll Cycle
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
1 of 36
INTRODUCTION
• Questions to be addressed in this chapter
include:
– What are the basic business activities and
data processing operations that are
performed in the human resources
management (HRM)/payroll cycle?
– What are the major threats and the controls
that can mitigate those threats?
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
2 of 36
INTRODUCTION
• Employees are an organization’s most valuable
assets:
– Their knowledge and skills affect quality and quantity
of goods and services.
– Labor costs are a major expense in generating
revenues and a key cost driver.
• The traditional AIS has not measured or reported
on the status of a company’s human resources:
– Financial statements do not regard employees as
assets.
– Under GAAP, the value of human services is not
measured until they have been consumed.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
3 of 36
INTRODUCTION
• The most important tasks performed in the
HRM/payroll cycle are:
– Recruiting and hiring new employees
– Training
– Job assignment
– Compensation (payroll)
– Performance evaluation
– Discharge of employees (voluntarily or
involuntarily)
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
4 of 36
INTRODUCTION
• There are five major sources of input to the
payroll system:
– HRM department provides information about
hirings, terminations, and pay-rate changes.
– Employees provide changes in discretionary
deductions (e.g., optional life insurance).
– Various departments provide data about the
actual hours worked by employees.
– Government agencies provide tax rates and
regulatory instructions.
– Insurance companies and other organizations
provide instructions for calculating and remitting
various withholdings.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
5 of 36
INTRODUCTION
• Principal outputs of the payroll system are
checks:
– Employees receive individual paychecks.
– A payroll check is sent to the bank to transfer funds
from the company’s regular account to its payroll
account.
– Checks are issued to government agencies,
insurance companies, etc., to remit employee and
employer taxes, insurance premiums, union dues,
etc.
• The payroll system also produces a variety of
reports.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
6 of 36
PAYROLL CYCLE ACTIVITIES
The five basic activities in the payroll cycle:
1.
2.
3.
4.
5.
Update payroll master data
Validate time and attendance data
Prepare payroll
Disburse payroll
Disburse taxes and miscellaneous
deductions
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
7 of 36
1. UPDATE PAYROLL MASTER FILE
• The HRM department provides information on new
hires, terminations, changes in pay rates, and
changes in discretionary withholdings.
• Appropriate edit checks, such as validity checks on
employee number and reasonableness tests are
applied to all change transactions.
• Changes must be entered in a timely manner and
reflected in the next pay period.
• Records of terminated employees should not be
deleted immediately as some year-end reports (e.g.,
W-2s) require data on compensation for all
employees during the year.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
8 of 36
1. UPDATE PAYROLL MASTER FILE
• The payroll department also receives
notification of changes in tax rates and
other payroll deductions from
government agencies, insurers,
unions, etc.
• These changes occur periodically.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
9 of 36
Update Master File Threats
1. Unauthorized changes to payroll master
data
2. Inaccurate updating of payroll master
data
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
10 of 36
Update Master File Controls
1a. Segregation of duties: HRM department
updates master data, but only payroll
department issues paychecks
1b. Access controls
2a. Data processing integrity controls
2b. Regular review of all changes to master
payroll data
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
11 of 36
2. VALIDATE TIME AND ATTENDANCE
DATA
• Some employees are paid on an hourly basis.
• Some employees earn a fixed salary, e.g.,
managers and professional staff.
• Sales staff are often paid on a straight commission
or base salary plus commission.
• Increasingly, laborers may be paid partly on
productivity.
• Some management and employees may receive
stock to motivate them to cut costs and improve
service.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
12 of 36
2. VALIDATE TIME AND ATTENDANCE
DATA
• The payroll system needs to link to the
revenue cycle and other cycles to calculate
these payments.
• It’s also important to design bonus schemes
with realistic, attainable goals that:
– Can be measured
– Are congruent with corporate objectives
– Are monitored by management for continued
appropriateness
– Are legal
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
13 of 36
2. VALIDATE TIME AND ATTENDANCE
DATA
• How can information technology help?
– Collecting time and attendance data
electronically, e.g.:
•
•
•
•
Badge readers
Electronic time clocks
Data entered on terminals
Touch-tone telephone logs
– Using edit checks to verify accuracy and
reasonableness when the data are entered.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
14 of 36
Validation Threats
1. Inaccurate time and attendance data
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
15 of 36
Validation Controls
1a. Source data automation for data capture
1b. Biometric authentication
1c. Segregation of duties (reconciliation of
job-time tickets to time cards)
1d. Supervisory review
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
16 of 36
3. PREPARE PAYROLL
• The employee’s department provides
data about hours worked.
• A supervisor confirms the data.
• Pay rate information is obtained from
the payroll master file.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
17 of 36
3. PREPARE PAYROLL
• Procedures:
– The payroll transaction file is sorted by
employee number (same sequence as master
file).
– For each transaction, the payroll master file is
read for pay rates, etc., and gross pay is
calculated.
• Hourly Employees: Gross pay = (hours worked x
wage rate) + Overtime + Bonuses
• Salaried Employees: Gross pay = annual salary x
fraction of year worked
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
18 of 36
3. PREPARE PAYROLL
– Payroll deductions are summed and
subtracted from gross pay to obtain net
pay. There are two types of deductions:
• Payroll tax withholdings
• Voluntary deductions
– Year-to-date totals for gross pay,
deductions, and net pay are calculated,
and the master file is updated. Cumulative
records are important because:
• Social Security and other deductions cease or
decline at certain levels.
• The information will be needed for tax reports.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
19 of 36
3. PREPARE PAYROLL
– The following are printed:
• Paychecks for employees--often accompanied by
an earnings statement, which lists pay detail,
current and year-to-date.
• A payroll register which lists each employee’s
gross pay, deductions, and net pay in a multicolumn format:
– Is used to authorize the transfer of funds to the
company’s payroll bank account.
– May be accompanied by a deduction register,
listing miscellaneous voluntary deductions for each
employee.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
20 of 36
Prepare Payroll Threats
1. Errors in processing payroll
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
21 of 36
Prepare Payroll Controls
1a. Data processing integrity controls: batch totals,
cross-footing of the payroll register, use of a
payroll clearing account and a zero-balance check
1b. Supervisory review of payroll register and other
reports
1c. Issuing earnings statements to employees
1d. Review of IRS guidelines to ensure proper
classification of workers as either employees or
independent contractors
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
22 of 36
4. DISBURSE PAYROLL
• Most employees are paid either by:
– Check
– Direct deposit
– In some industries, such as
construction, cash payments may still
be made, but does not provide good
documentation
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
23 of 36
4. DISBURSE PAYROLL
• Procedures:
– When paychecks have been prepared, the
payroll register is sent to accounts payable for
review and approval.
– A disbursement voucher is prepared to
authorize transfer of funds from checking to
the payroll bank account.
• For control purposes, checks should not be drawn on the
company’s regular bank account
• A separate account is created for this purpose
– Limits the company’s loss exposure
– Makes it easier to reconcile payroll and detect paycheck
forgeries
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
24 of 36
4. DISBURSE PAYROLL
– The approved disbursement voucher and payroll register are sent to the
cashier. The cashier:
• Reviews the documents.
• Prepares and signs the payroll check to transfer the funds.
• Reviews, signs, and distributes employee paychecks (which
separates authorization and recording from distribution of
checks).
• Re-deposits unclaimed checks in the company’s bank
account.
• Sends a list of these paychecks to internal audit for
investigation.
• Returns the payroll register to payroll department, where it is
filed with time cards and job time tickets.
• Sends the disbursement voucher to accounting clerk to
update general ledger.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
25 of 36
4. DISBURSE PAYROLL
• Efficiency Opportunity: Direct Deposit
– Direct deposit can improve efficiency and
reduce costs of payroll processing
• Employee receives a copy of the check and an
earnings statement
• Each bank receives a record of the payroll deposits for
that bank via EDI. The record includes:
–
–
–
–
Employee number
Social Security number
Bank account number
Net pay amount
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
26 of 36
Disburse Payroll Threats
1. Theft or fraudulent distribution of
paychecks
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
27 of 36
Disburse Payroll Controls
1a. Restriction of physical access to blank payroll checks and
the check signature machine
1b. Restriction of access to the EFT system
1c. Prenumbering and periodically accounting for all payroll
checks and review of all EFT direct deposit transactions
1d. Require proper supporting documentation for all paychecks
1e. Use of a separate checking account for payroll, maintained
as an imprest fund
1f. Segregation of duties (cashier versus accounts payable;
check distribution from hiring/firing; independent
reconciliation of the payroll checking account)
1g. Restriction of access to payroll master database
1h. Verification of identity of all employees receiving paychecks
1i. Re-depositing unclaimed paychecks and investigating cause
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
28 of 36
5. DISBURSE PAYROLL TAXES AND
MISCELLANEOUS DEDUCTIONS
• The employer pays some payroll taxes
and employee benefits directly
– The employer withholds federal and state
taxes from employee paycheck, along with
Medicare tax, and the employee’s share of
Social Security.
– May also withhold voluntary deductions such
as union dues, United Way contributions,
credit union savings, retirement contributions,
etc.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
29 of 36
5. DISBURSE PAYROLL TAXES AND
MISCELLANEOUS DEDUCTIONS
• In addition, the employer pays:
– A matching amount of Social Security
– Federal and state unemployment taxes
– The employer share of health, disability, and
life insurance premiums, as well as pension
contributions
• Some companies offer flexible benefit
plans, sometimes called cafeteria-style
benefit plans.
– These plans offer a menu of options.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
30 of 36
5. DISBURSE PAYROLL TAXES AND
MISCELLANEOUS DEDUCTIONS
• The company must periodically prepare
checks or EFT to pay tax and other
liabilities.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
31 of 36
Disburse Taxes and Deduction Threats
1. Failure to make required payments
2. Untimely payments
3. Inaccurate payments
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
32 of 36
Disburse Taxes and Deductions Controls
1 and 2. Configuration of system to make
required payments using current
instructions from IRS (Publication Circular
E)
3a. Processing integrity controls
3b. Supervisory review of reports
3c. Employee review of earnings statement
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
33 of 36
OUTSOURCING OPTIONS
• Many entities outsource payroll and HRM
to:
– Payroll service bureaus
• Maintain the payroll master file and perform payroll
processing activities
– Professional employer organizations (PEOs)
• Perform the services of the payroll service bureau
• Also administer and design employee benefit plans
• Generally more expensive than payroll service
bureaus
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
34 of 36
OUTSOURCING OPTIONS
• When organizations outsource payroll
processing, they send the service bureau
or PEO at the end of each period:
– Personnel changes
– Employee time and attendance data
• The service bureau or PEO then:
– Prepares paychecks, earnings statements,
and a payroll register
– Periodically produces tax documents
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
35 of 36
OUTSOURCING OPTIONS
• Outsourcing is especially attractive to small and
mid-size businesses because:
– It’s often cheaper for smaller companies
– The bureau or PEO may provide a wider range of
benefits
– It frees up the company’s computer resources for
other areas
• However, companies must carefully monitor
service quality to ensure that these systems
integrate HRM and payroll data in a manner that
supports effective management of employees.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
36 of 36
