Does the thought of a payroll audit make you break out into a sweat? That’s how most people respond. The thing is if you have clean reporting in place and a review/oversight process along with them, you will be in good shape and have nothing to worry about. But how do you know if you have everything you need?
There are some basic broad-brush reporting approaches you can take to make sure you are in good shape. Start with the:
- Summary roll-up report
- All-employee detail report
- All deductions report
- Federal, State, and Local tax reports
- Payroll expenditures compared to the budget report
These reports will provide you with the information you need to conduct a thorough review of your payroll processes. Throughout this article, we’ll talk about whether or not payroll reporting really matters and what’s absolutely mandatory. Yes, you read that correctly — there are mandatory payroll reports.
Do payroll reports matter?
Your payroll reports serve multiple purposes. They’re worth a lot more to you than simply taking up storage space or checking an administrative to-do box.
When you take advantage of the information you can access within your payroll system, you are able to:
- Comply with federal, state, and local reporting laws
- Review pay practices by slicing your data in multiple ways
- Ensure your payroll expenditures aren’t getting away from your budget
- Make adjustments where you need to
Your payroll reports are a goldmine of information that can keep your business humming, and your employees focused on getting things done.
5 crucial payroll report templates to have in your arsenal
When people think of payroll reports, the first thing they usually think of is payroll taxes. We’re kind of conditioned toward that mindset since, as individuals, we file our personal taxes at least annually, if not more often.
Although it’s critical and not something you want to ignore, there’s much more to payroll reporting than ensuring you’re correctly paying your taxes.
Below we’ll discuss the reports that your payroll auditors will most likely request when you go through your annual or bi-annual compliance overview process. Each of these reports should provide a view of the data for the current pay period, quarter-to-date, and year-to-date.
Total payroll summary by category
Your payroll houses a gold mine of data. Having a summary roll-up report that can be sliced and diced through a deeper dive is where you want to start. This report is generally referred to as your payroll register or payroll journal. It should include a roll-up company view of:
- All compensation paid (including cash equivalents and fringe benefits such as rewarded sales trips)
- The number of hours worked by hourly employees
- Each deduction type
- All taxes paid for both the employee and the company
- How much was paid to contractors and freelancers (even if this information has to be pulled from accounts payable)
This report is not only beneficial for a high-level company review, but it provides valuable information at a division and department level as well.
Your payroll houses a gold mine of data. Having a summary roll-up report that can be sliced and diced through a deeper dive is where you want to start.
Payroll detail by employee
There will be a general employee detail that is alphabetically sorted, listing all employees in the company by name and position. This is a very detailed view of:
- How the employee is paid, whether that be hourly, salaried, draw, commission
- The number of hours an hourly employee worked
- How many hours of overtime an employee earned
- The metric used to determine commission payments
- Incentive payments provided along with their associated metric
- Bonus payments
- Length of service with the company
- The amount of time the employee has been in their current position
- PTO accruals
- How much PTO has been used
- All deductions taken
A scrubbed version of this report is typically sliced and diced in a few different ways to provide information by division and by department. To comply with privacy laws, these versions of the reports have sensitive data removed, such as the employee’s tax identification number, personal deductions, and birth date.
This report is valuable for reviewing pay practices across positions by protected class. Since the date of birth is removed from these views, a manager concerned that ageism may be an issue for a department should work with HR to determine if it is, in fact, a problem and how to rectify it.
Pre- and after-tax deductions, including garnishments
Although this is a roll-up of a portion of the employee data we discussed, it is a critical report you need to have. This report ensures you are processing all employee pay deductions correctly. For example:
- Certain benefits deductions can be taken on a pre-tax basis. However, other elective benefits must be done on an after-tax basis.
- Similarly, retirement benefits can be taken on a pre-tax basis up to a specific percentage of an employee’s gross pay if they are qualified retirement plans. Otherwise, those deductions must be taken after-tax.
- Garnishments are another example of after-tax deductions. They can get sticky in that you need to be able to demonstrate that you are complying with the court order not only for the amount of the garnishment but also for the specified amount of time that it’s effective.
This report allows you to ensure you are complying with the various IRS regulations that govern payroll deductions.
Tax withholdings and payment history
The fact that the IRS requires you to file quarterly and annual tax returns isn’t a surprise, but how are you going to make sure that you’re paying the correct amount? Maintaining a report that details how much you’ve deducted from your employees and, when appropriate, have set aside for the employer portion for:
- FICA – both the employer and the employee pay FICA. You will need to complete and submit Form 941 quarterly for this.
- FUTA – To comply with the Federal Unemployment Tax Act (FUTA), you must submit Form 940 annually.
- Annual employee tax reporting – Every company knows their employees look for their W2s in January, and you must have them mailed by a specific date.
- Annual contractor and freelancer payment reporting – Anyone who uses contractors to complete assignments must provide them with a 1099 if the contractor earns more than a specified dollar amount.
- Applicable retirement plan reporting – Employers must provide detail of how their retirement plan monies are being collected, managed, and distributed via Form 5500.
You’ll also need to annually certify that your eligible employees had access to your health care plans by providing each employee and the IRS with a 1095-C and 1094-C, respectively.
Payroll expenditures to budget
Your finance department will want to be able to compare how your payroll expenses are tracking to the monthly, quarterly, and annual budget. This cash requirements report will help you track your overall payroll expenditure and give you a tool for forecasting your company’s future payroll budgetary needs.
This report will have a straightforward design. It will show the following at the company, division, and department levels:
- Payroll budget
- Compensation paid
- Deductions taken
- Taxes paid
By making sure that you know the contents of these reports and addressing any issues that arise as a result of your consistent review, you will be prepared to address questions your auditors may have. Even better, if the local department of labor decides to visit, you’ll be prepared for them, too.
Do auditors really care about your payroll reports?
confidentiality of employee information is imperative. How you manage that confidentiality will also be something that is reviewed by auditors.
In a word. Yes.
From an auditor’s — or even worse, a regulator’s perspective — how can you possibly know what’s going on with your payroll if you don’t have accurate reporting that you take time to analyze? These individuals will want to review your payroll from multiple directions:
- A complete organizational roll-up
- Each department’s payroll management practices
- All employees by exemption-type, protected statuses, location, pay type, pay level
- Consistency of tax payments, deductions taken, and how all are reported
This was touched on above, but it can’t be stressed enough — confidentiality of employee information is imperative. How you manage that confidentiality will also be something that is reviewed by auditors.
How to avoid the stress of accurate reporting
You get that complete accuracy in your payroll reporting is a non-negotiable. But how do you make sure you’re at that level?
First and foremost, don’t recreate the wheel every pay cycle. If you are using a spreadsheet process or some other manual process to complete your payroll, we want to encourage you to take some time and stress off of your desk and use an electronic payroll system.
There are 3 primary ways you can make your life easier when it comes to your payroll reporting:
- Create templates that you can consistently populate. If you only have a handful of employees, you may choose to use a simple process. Even so, you’ll still want to make sure you have consistent reporting that you can aggregate at the end of each quarter and year-end. Use the same format and information each time.
- Automate the process. Use a system that will allow you to create customized reports and will automatically populate those reports with the data from your payroll process.
- Outsource the process. Many companies specialize in payroll processing, including generating all required reports and filing necessary tax and regulatory forms. It’s worth looking into when you consider the overall time you can dedicate to other essential business functions.
Any of these are viable solutions. You don’t need to stress about accurate payroll reporting on top of everything else. You have plenty on your plate.
Show you have your ducks (and payroll processes) in a row
When you have consistent payroll reports and routinely analyze the data they provide, you can be sure that you’ll end up with a clean payroll audit. Your auditors are there to help you remain compliant, but it’s much nicer when you get that stellar report from them.
Ensuring you have and use the reports we’ve discussed will leave you with that superior level of comfort.
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