Payroll accounting: What are its uses?

If you want to run a successful company, there will be many challenges to overcome. Apart from the operational side of things, one of the main focuses is the bureaucratic burden which will grow exponentially as long as your company does. Payroll accounting, for example, goes far beyond the timely processing of monthly salaries: Reporting requirements need to be complied with, and personnel master data must be maintained without losing track of your employees. This is much easier said than done. There are many companies that decide to outsource payroll accounting to external service providers, and for good reason.

What is payroll accounting?

Payroll accounting deals with the recording, settlement and distribution of wages and salaries, as well as employees’ statutory and voluntary deductions. The purpose of this is to calculate the salary entitlement (gross and net) of all employees for the period in question. Additionally, however, the results of payroll accounting serve as the basis for the calculation of payroll costs, as well as the associated social expenses in company accounting. Accounting documents include timesheets, work time-cards and employment contracts. UK employers are obliged to use the HMRC’s PAYE system where employees earn more than £118 per week as part of their payroll.

Payroll accounting includes the following tasks:

  • Maintaining personnel master data
  • Run payroll by sending HMRC the relevant pay deductions
  • Maintain employee forms and information

Employers usually use an employee’s tax code and National Insurance category to calculate how much they need to deduct from pay. Payments on the PAYE system are usually due by the 19th or 22nd of a month (the latter date applies to electronic payments). Companies may assign their own payroll numbers to each employee. Small and medium-sized enterprises often use personnel information systems (PIS) in their payroll accounting, while large companies usually use corresponding ERS (Enterprise Resource Planning) system modules.

Definition: Payroll accounting

Payroll accounting is the recording, settlement and posting of company wages and salaries. It is a key part of the company’s accounts and is mandatory for the majority of all companies. Payroll accountants need extensive knowledge in the fields of labor law, payroll tax law and social security law.

Payroll accounting: Their key tasks

The cost of payroll accounting doesn’t just depend on the size, but also on the kind of company. In particular, the type of staff remuneration pays a major role here. If employees or workers are paid by the hour, and if overtime and working hours are paid additionally for weekends, this results in a lot more work for the payroll accounting department, compared to fixed salaries. The general personnel policy also affects the payroll accountant’s workload, as frequent additions and departures in the staff requires much more bureaucracy than a constant workforce. But what are payroll accounting’s specific tasks and responsibilities?

Creating and maintaining employee payroll accounts.

As mentioned above, a separate payroll account must be created and maintained for each employee. This account will contain general information about the person and their salary. In the case of an external payroll audit, the payroll account makes it easier for HMRC to check each person’s payroll tax deductions. Personal and salary information that employers should collect about their staff should include:

The data they must collect from an employee to submit to the HMRC includes an employee’s National Insurance number, address, date of birth, their start date, their tax code and National Insurance category, student loan information (where applicable), weekly hours and pay.

  • Employee’s first and last name
  • Gender
  • Full address
  • National Insurance number
  • Job title
  • Date of birth
  • Starting date
  • Payroll period
  • Remuneration and type of remuneration (e.g. wage or commission)
  • Hours worked
  • Student loan
  • Withheld payroll taxes

Individual personnel account records may be kept by third parties, as long as the accounting format and procedures used are in accordance with the principles of proper accounting.

Each time an employer makes a payment through PAYE using the HMRC Full Payment Submission, they must report an employee’s National Insurance number, name, address, payroll ID, their pay and benefit deductions such as healthcare or pension contributions. For more guidance on how to report payroll information, you can consult the HMRC website.

Most importantly, the data must be stored and should be made available to the tax office at any time in a comprehensive form. To this end, the tax authorities require a certain standard whether the records be transferred electronically or in paper form.

Note

The following retention periods apply to payroll accounting:

3 years: Hiring papers, 1-9 documents, time-cards, employee handbooks, FMLA Leave details, termination documents, information pertaining to raises or changes in employee pay.

4 years: Pay slips, W-4 and other tax documents.

6 years: Retirement and 401k contribution information.

Be sure to check with your state authorities for any additional or changes to the retention periods.

Reporting obligations during employment

For the duration of an employee’s time working at your company, payroll accounting is responsible for reporting, paying taxes and National Insurance contributions on behalf of the employee. This can be done online through PAYE. A full list of due dates for filing these documents can be found here.

Reporting obligations at the end of employment

Regardless of how the employment relationship has ended (termination, end of contract, etc.), there are certain obligations still in place for the payroll accounting department. They are obliged to notify the HMRC that the employee is no longer working there.

Note

When an employee is deregistered with HMRC, the company is no longer classified as their main employer. Once this has happened, the new employer can become registered as the primary employer.

End of year payroll accounting obligations

All companies are obliged to prepare an end-of-year final report. These allow HMRC to verify benefits and expenses and confirm that taxes are paid at the correct rate. In some cases, employers may receive compensation if, for example, they’ve overpaid for their employees. Differences may occur where salaries or bonuses changed during a year. Final payroll reports are sent by April 5th and employers must hand a P60 to their employees. The P60 shows an employee how much they’ve earned in the last tax year

alongside a breakdown of taxes and National Insurance taken out.

When is payroll accounting necessary?

As soon as a company employs people, they’re automatically obliged to perform payroll accounting. This is due to the notification obligations previously mentioned to HMRC. Employers in the UK are required to issue payslips. There are some exceptions, for example, if a worker is a freelancer or contractor or they work in certain sectors such as the police force or share fishing.

Payroll accounting: Is it worth doing yourself or should you outsource it?

Payroll accounting responsibilities and tasks are extensive. Even in smaller companies, these tasks involve a great amount of time and effort. In particular, accuracy is very important when creating remuneration statements. If there are errors, HMRC and health insurance agencies will quickly notice, and you could face penalties. Using an external service provider will ensure that your payroll accounting needs are being met to the highest professional standards.

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The main advantage of having an external payroll accounting department is the wealth of experience these offer, since they are usually serving a large number of clients. Error-free payroll accounting is always in their interests, so they will always strive to be up-to-date with current legislation. A good relationship between a company and their external payroll provider is important to guarantee correct payroll accounting. The following table summarises the measures for minimising risks in external and internal payroll accounting:

Tips for internal payroll accounting Tips for external payroll accounting
Make use of specialist resources and attend regular training courses You can select your service provider based on the recommendation of other experienced business owners
Inexperienced/unqualified accounts staff should complete a beginner’s guide to payroll accounting course Be sure to answer any queries in a timely manner
Be sure to provide statements to different authorities, bodies and health insurance agencies in writing Use the external payroll departments checklists/questionnaires
When in doubt, go for the highest possible levy – better to reimburse than have to make greater deductions later. When in doubt, go for the highest possible levy – better to reimburse than have to make greater deductions later.
Be sure to update your software regularly Only conduct written correspondence (for proof later, if necessary)
Regularly review and update employee payroll accounts Regularly conduct feedback interviews

Please note the legal disclaimer relating to this article.


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