Controls for Outsourced Payroll Processing

Many companies do not process their payrolls at all. Instead, they send time­keeping and pay rate information to a third party, who processes the payroll, sends back paychecks to the company for distribution, and remits taxes on behalf of the company. Generally speaking, the use of payroll suppliers re­duces the level of control needed over the payroll process, especially if the company elects to have the supplier make payments to employees with di­rect deposit; by doing so, no controls over the handling of checks are needed.

Controls for Payroll Best Practices

Notes:

  • Once submitted, direct deposit usually begins on your second paycheck.
  • Payments should appear in the account at your financial institution on the scheduled pay date.

Attach a Voided Check Below:

Direct Deposit Authorization

The essential process flow is shown in Exhibit 7.15. The process differs from that of an in-house computerized system in only a few areas. First, any special payments outside regularly scheduled pay cycles are handled with manual checks, which must be entered into the supplier’s payroll system as part of the next pay cycle. Also, the supplier handles all tax remittances, check printing, and direct deposit payments.

System of Controls for Outsourced Payroll Processing

The controls shown in the exhibit are not described in more detail, since they merely repeat controls already described in the manual payroll processing section. In addition to these basic controls, the next supplemen­tary controls can be added.

  • Request verification of all tax remittances. Though payroll suppliers have an excellent record of making tax remittances on behalf of a com­pany in a timely manner, there is a slight chance of this not occurring. If so, the more paranoid controller may wish to request verification of all tax remittances, or at least until the supplier has established a history of handling remittances reliably.
  • Route all paychecks through a single company contact. Some payroll suppliers will mail employee paychecks to a variety of company loca­tions, for local distribution. However, there is a significant risk that some paychecks will be mistakenly batched together and sent to the wrong location. To avoid this problem, it is sometimes better to require that all paychecks be sent to a single location, where they can be batched and reissued by company staff to all company locations.

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