Does Payroll report to HR or Finance?

Liz Armstrong's Profile

Does Payroll Report To HR Or Finance?

I'm interested in getting feedback from large employers (over 100 employees) with out-of-state employee and have somewhat complex payroll (lots of deduction and earnings codes, various incentive programs-commission & bonuses, fringe benefits, recording manual checks).  I'm trying to determine the most appropriate structure in regards to payroll employees. 

Do the employee(s) processing the payroll report to Finance/Accounting or Human Resources dept?  Who records all the payroll related journal entries?  Is it asking too much for an HR employee to be a "numbers" person?

Currently we split the function between HR and Finance.  HR handles the Master payroll changes and but Finance handles any "numbers" related input (check caluclations, bonus/commssion input).  The bulk of the payroll processing falls into Finance.  The Finance employee who works on the payroll also records all the journal entries. 

Thanks in advance for your input!



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Answers

Member's Profile

I have had payroll reporting to either Finance or Accounting, but never to HR - irrespective of company size (including some way over 100 emps). HR can be handy for keying in changes to employee status, pay rates, etc., but those are purely data entry items. When it comes to any and all reporting, auditing, ledger entries, etc., that is all finance or accounting. I don't know why HR would even want to touch that and I'm pretty sure the company would not want them making accounting entries.

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Agreed. Payroll reports into Finance other than the initial data inputs regarding employee status, pay rates, etc.. and I think for several reasons it makes sense, most importantly due to the amount of critical entries and reporting that is required.

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I agree with Jeff Taylor. Payroll should report to Fin/Acctg. There are too many GAAP and tax implications associated with payroll. HR is ill-equipped to ensure that Payroll is handled correctly. HR should maintain the master employee database, provide the necessary payroll and tax forms to employees and feed the information to Payroll so that employees can be set up in the Payroll system. To me, the size of the organization is irrelevant. I would never have Payroll report to HR unless you enjoy Federal and State payroll tax problems and ugly audits.

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Liz, I found this free white paper here on Proformative titled,

"An Executive’s Guide to Cutting HR Costs:"

http://www.proformative.com/whitepapers/executive%E2%80%99s-guide-cutting-hr-costs

You also might want to take a look at this free webinar, with one unit of free CPE credit, here at Proformative titled,

"How HR Impacts the Bottom Line: Quantifying the Value of Human Capital" http://www.proformative.com/events/how-hr-impacts-bottom-line-quantifying-value-human-capital

Best of luck.... Sarah

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Member's Profile

I have seen payroll roll under HR in most large companies, under accounting in smaller companies that really don't have an HR group per se.

I don't think it makes sense to have payroll under HR given that most in the HR profession are not skilled at the quantitative side of things. I have spent many hours trying to teach finance & accounting to HR personnel.

To me it sounds like the way you have it set up might be optimal.

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Member's Profile

In organizations that I have been with, payroll usually reported to finance/accounting or to a separate service organization, but never directly to HR. The size of these organizations range to under 100 employees to greater than 100,000. Often, I see HR input benefit changes into the payroll; however, that function can often be provided by the payroll function. For separation of control purposes, I see HR input salary changes and new employee information into the payroll system.

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With multi state taxes, deductions, and benefits for larger companies, it is usually more economic to outsource payroll. The complexity, change management, confidentiality, and potential impact of errors create to much risk for the HR/Finance department to keep in house. Outsourcing allows the segregation of duties keeping individual employee information in the HR department, and the cash/accounting in the Finance department.

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At our large corp, payroll reports to HR, but it previously reported through finance. It doesn't necessarily make sense, but not everything does at a large company.

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We have about 2500 EE's and are in about 21 states. Our structure is a little different. HR enters new hires, Pay changes, and Terms. P/R verifies them during the P/R processing. Benefits both new, changes and terms are entered by our Benefits Dept. These also are verified by Payroll when processing payroll. All of these task fall under Operations. I am a dotted line between Accounting and Operations. I am responsible for all of the tax payments and returns, GL Analysis and any JE needed. I also monitor 401K, Deferred Comp, (All) Benefits post and pre tax, Flex accounts, COBRA Subsidy and Accruals. I also interface with our Payroll Software and our Tax software. I trouble shoot issues and test upgrades that affect the above areas. I would never put Payroll under HR. In my 30 years P/R has always been under Accounting with a large portion of the cost of a business being Payroll expense who better than Accounting to oversee.
Hope this helps

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I fall on the side of payroll remaining a purely accounting function, with a clear interface with HR on 'master file' types of data.

However, please do not lose sight of the fact that the payroll person(s), must have somewhat of an HR flair and not be a straight accounting type. The issues of confidentiality and employee relations are intertwined in the processing of payroll and must be taken into consideration. I'd say generally an HR manager is well versed in dealing with employees and confidentiality, whereas, most controllers are not.

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This a chicken or egg question. In my experience, with companies having more than 100 employees, HR normally handles all the initial input for new hires, bonuses, promotions, terminations, etc. Normally, this is nothing more than inputting data from a form into a software program equipped to manage the employee data base. Once that occurs, the accounting department would be responsible for all accounting type issues including taxes, payments to employees, providing year-end w-2's, SEC reporting requirements, etc. The finance/budgeting area would be responsible for the overall approval and monitoring of staffing costs and head count.

In short, there can be no one department responsible for all HR/Payroll functions. The bigger question I would ask is who should the HR department report to. Should it be the CEO, COO or CFO?

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Strong internal controls would dictate that payroll report to the accounting or finance department. If the function reports to HR there should be periodic audits performed by accounting to ensure that there are no ghosts in the payroll register.

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The way I have had this set up in the past was that the HR department managed not only the general HR information/tracking system, but also processed payroll. We used ADP and then later used Paychex. It was a small business, and so as CFO I supervised the HR Manager and also the Controller, who managed the accounting staff.

In our situation, I let HR do all of the payroll work, and then I personally reviewed the pay report before the payroll was processed. I then made sure that the accounting group got a report after each payroll that showed General ledger summary totals so they could record the transaction properly. This kept individual pay information confidential but also ensured that the accounting side was recorded properly. If there was a question about an amount on the G/L report, or there was an unusual accounting issue relating to a person's pay, I or the Controller would interface with the HR person. This ensured that no more than 3 of us were "in the know" in regards to detailed pay information.

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We employ over 3,000 personnel, with around 700 white collar and the remainder as blue collar labour. I support the notion of Payroll being located within HR. the reason for this is that Payroll is effectively a service to employees of the company. HR are better equipped to deal with queries from employees.

By all means, there is definitely an accounting / finance role to play. There is no reason as to why the administration of payroll and running the regular payruns cannot sit within HR, whilst the accounting / finance function ensure that adequate controls, reconciliations and accounting entries are made.

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I have always been an advocate of the processing of payroll being an Accounting functional responsibility. The actual transactional processing and subsequent GL recording of disbursements and related accruals needs to have the Accounting technical competence to perform these accurately and timely. That skill set does not typically reside in HR.

Payroll processing, like AR billing and AP payment processing, has the IT system set up between the Masterfile component and the actual transaction processing. Masterfiles create the basis from which a transaction can be processed, and this function should always be separated from those that actually process the payment transaction, in this case paying employees.

It would be appropriate to have the Payroll masterfile maintenance under the HR domain, and within larger companies this is what you will typically see.

In the real world, and in addressing the question for "over 100 employees", smaller payroll populations will likely have same person maintaining both the masterfiles and transacting the payroll processing cycles. In this instance it is incumbent on Management to have an effective method to monitor these conflicting responsbilities. ADP as far back as 20+ years ago had in their compliment of reports a listing of all masterfile changes made. I'd always review these with each payroll cycle processed.

A real life example of where as the incoming CFO, HR had all payroll processing as a direct report, and it turned out bad.

The payroll person set up in the masterfile a quantity of exemptions that exceeded the maximum allowable number. This was absent the required approval from the IRS Regional Director's office to exceed the threshold (I think the threshold was over 8). The effect was to have zero FIT withheld, increasing the net pay.

Beyond this, when her personal hours input triggered Federal Income tax withholding, she "split" the paychecks, made the first one not have FIT withheld, and made the second check calculate to zero on FIT. This violates IRS reg's for Income tax withholding calculation methods (there are only 2 methods : either based off the "wage bracket tables", or on a flat percentage). The employer is being liable for the correct amount of FIT that should have been withheld, along with penalties and fines for not complying with IRS withholding tax law requirements.

The worst part about this was the HR-VP didn't see this as a problem, she was protecting her employee. It took some time to get this resolved.

The moral to the story is you should separate who has systems access between the masterfile components vs. who can post hours and amounts to disburse payroll (whether manually input or automated), and where this is not segrated, Management should be closely monitoring these activities.

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