Utilizing Business Managed Services for Payroll Services

1. Human Resources Information Systems

   The HR system is responsible for maintaining each employee's data and documentation needed to support preparing and processing payroll, including employee information (name, address, social security number, etc.). In addition, it manages employee status, employee classifications, PTO policies, wage data, salary increases, retirement contributions, change of addresses, fringe benefit selections, payroll deductions authorization forms and all matters affecting the status of the employee's pay. Federal contractors should pay close attention to setting up employee classification, paid-time-off-policies, and handling benefit selections as they are critical to running payroll accurately and producing labor cost detail for the invoices and job cost reports.

   • Handling employee classes: Every business employing salaried, hourly and SCA workers may provide different benefits for each class of worker, based upon the company's approach to providing fringe benefits. There may be a different policy in place for medical coverage or the amount of paid time off based on the employee classification. This information needs to be captured and utilized when setting up the HR data for each employee allowing for the accurate processing of payroll along with the appropriate costs flowing to the appropriate segregated costs as required by CAS. In a related blog: Service Contract Act - Managing SCA Contracts, we describe the unique requirements for handling SCA workers.
     
     
   • Handling paid time off: Every business establishes policies that define how workers will be compensated for time off. This includes sick and vacation leave. A current trend is to combine sick and vacation leave into a combined paid-time-off (PTO) pool. However, SCA contracts, as well as some states require sick, and vacation leave to be tracked separately.
     
     
   • Handling employee benefits selections : Each business may offer employees' fringe benefits, such as medical, dental, vision, retirement, as well as before tax spending accounts. The HR system usually tracks all the employee benefit selections. This information is required by the payroll system to properly prepare payroll for each employee. The payroll system calculates the employer and employee cost of each benefit per pay period and records the current amount and the year-to-date amount for each benefit type. The difficulty here is that federal contractors may utilize one or more fringe benefit packages that will be used when calculating fully burdened labor cost.
2. Timekeeping System

   Labor costs are often the largest expense for most government contracts. This is not lost on the government. They mandate that every employee who works in your organization that is assigned to work on a government contract, either directly or indirectly, must maintain a timesheet. These timesheets must include all the active projects employees are working on, both government and commercial. The timesheet must also allow them to record indirect labor categories such as vacation, holidays, sick and administrative time.

   It is also a DFAR requirement for your organization to put in place the following timekeeping policy:

   • Employees must complete their timesheet daily.
   • If using paper-based timesheets, they must be prepared in ink.
   • Employees must record all time spent (even if more than 40 hours/week)
   • Employee must sign off on the timesheets and must get their supervisor's approval.
   • Any corrections must be handled as follows ... do not ease anything, draw a line through any errors and write in the correct information, initial and date the corrections.
   • If using electronic timekeeping, the system must be able to maintain an audit trial of the corrections and approvals.

   Your timekeeping system may be either paper-based or electronic. The government doesn't make blanket approvals for commercially available electronic timekeeping systems. In fact, most if not all fail DCAA requirements. To be considered acceptable by a government auditor, an electronic system must provide a date stamped audit log for all data entry including changes and approvals ... this provides the required audit trail. REMEMBER LABOR IS A MAJOR COMPONENT AND COST OF FEDERAL CONTRACT DOLLARS AND THEY WILL AUDIT ITS VALIDITY. Federal contractors should also pay close attention to how the timekeeping system handles special pay types and leave accruals for SCA employees. Using a commercial timekeeping system is usually not adequate.

   • Handling hourly workers pay types : The timekeeping system should be capable of being configured to record hours worked each day by pay type, such as when an employee is taking time off (sick or vacation), when an employee works regular, overtime, or hours associated with shift work. Overtime or shift work requires pay premiums or other special handling by the payroll system when computing gross pay.
     
     
   • Handling SCA leave accrual: Depending on the PTO policy in place, when processing the timekeeping or payroll, the system must determine the correct amount of sick, vacation or combined leave to accrue for each employee. This calculation will be based on the PTO policy in place for each employee. SCA contracts require workers to be provided all vacation leave based on length of service on their anniversary date and this length of service is inherited when contracts move from company A to company B. This is a difficult requirement to satisfy using the timekeeping system provided by most commercial payroll providers.
     
     
   • Handling effective rates: A federal contractor who has salaried employees that work more than 40 hours in a week will require an effective rate calculation to ensure that all final cost objectives whether a federal or commercial contract receive their fair and equitable share of the labor cost. This requirement is especially important and will be a focus area on a cost reimbursable contract. The effective rate is required to calculate the labor cost which begins the segregated cost burdening process. If the effective rate is incorrect the segregated costs are incorrect and your invoice to the federal government is incorrect. The timekeeping system of commercial payroll providers are not set up to handle this requirement.
3. Expense Reporting System

   While the IRS does allow employers to reimburse employee expenses through payroll, some tax implications can come with doing it this way. For example, if the reimbursement is not made as part of an accountable plan, it will be taxable to the employee as wages. Another approach is to set the employee up as a vendor and utilize Accounts Payable to pay them just like other vendors are paid.

   • Handling JTR requirements: Federal contractors are required to follow the rules defined in the joint travel regulation (JTR) regarding the per diem rates to be re-imbursed for travel expenses. Without prior approval from the government, expenses that exceed per diem must be treated as unallowable. This requires an expense reporting system configured to follows per diem rates and alert the user of any travel that exceeds the per diems.
4. Billing System

   Federal contractors who have been awarded SCA or cost reimbursable contracts need the HR, timekeeping, and payroll systems to work together to calculate fully burdened labor cost which is required to generate the labor cost detail needed to produce accurate invoices and project cost reports.

   • Handling SCA requirements: SCA contracts require the contractors to pay all SCA covered workers sick and vacation benefits as well as health and welfare benefits determined by the wage determination. The rules for how these requirements are met are complicated and require the payroll and timekeeping system to be able to handle them. Most out-of-box systems do not provide the capability to handle SCA requirements.
     
     
   • Handling cost reimbursable invoice generation: When invoices are generated for a cost reimbursable contract, the government requires them to show both the direct labor and the indirect segregated cost including the fringe, overhead and G&A. This information is not available unless the accounting, timekeeping and payroll systems are integrated.
     
     
   • Handling project cost: SCA and cost-reimbursable contracts require compliance reports and job cost reports that rely on labor cost detail that show direct labor with indirect rates applied. To avoid manually generating this detail requires integrating the accounting, timekeeping, and accounting system to support calculating fully burdened labor cost.
5. Accounting System

   Once payroll has been prepared and processed i.e., gross, net and payroll taxes have been calculated, the results must be recorded in the company's accounting system. If payroll has been outsourced, this must be done manually using the payroll summary which will be used to enter the appropriate journal entries to record the payroll. If payroll have been integrated as shown in the diagram above, this step is automated.

What records must be maintained after processing each payroll?

Preparing and processing payroll requires data from the HR and timekeeping system as outlined above. The payroll system uses these inputs to calculate the gross pay for each employee. When processing payroll, the system must accurately calculate the net pay of each employee as well as the tax withholding based on the employee status and work location. The system must track the current period amounts as well as the year-to-date amounts for each pay type, deduction, and tax withholding.

Properly accounting for payroll means keeping accurate records and summarizing and recording all payroll transactions and payments. Here's a short list of tasks that must be done after processing each payroll.

• Record keeping: Businesses are required by law to keep a year-to-date record of each employee's gross and net pay and deductions. This is called the employee earnings record. It must be updated for each employee after every pay period. By law, you are required to keep payroll tax records for at least 6 years.
  
  
• Maintaining the payroll register: A payroll register lists earnings for all employees by pay period. The register has gross and net earnings, plus deductions by type. This information is used as the basis for the journal entries for recording the payroll. The information maintained by the register is used to complete the payroll filing required by the federal government.
  
  
• Making employee payments: Paychecks can be distributed manually, mailed or funds may be transferred electronically directly to the employee's bank account (direct deposit).
  
  
• Recording Payroll: The payroll must be recorded in the accounting system. The payroll register is the record of earnings and deductions for all employees each pay period. Its totals can be used as the basis for the journal entry to record payroll.
  
  
• Generating employee paystubs : Employee paystubs are generated after each payroll run. The paystubs show gross, and net and deductions by type. The stubs also list year-to-date totals in these categories. For paychecks directly deposited, the advice, or remittance summary, also provides this information.

How Do You Decide if Outsourcing Payroll Is the Right Option?

Now that you have a better understanding of the requirements to properly prepare and process payroll and the record keeping requirements, it is evident why many businesses send their payroll data to outside firms like Paychex, Paycor, Paycom or Automated Data Processing, Inc. (ADP) to be processed.

For a small fee per employee, you can submit employee hours, deductions, and salary amounts and these services will compute the payroll. In addition, these services can also handle employee retirement programs, direct deposit paychecks, compute tax withholdings, generate paystubs and W-2 forms of the employee annual earnings and payroll tax returns.

How do you select the right payroll provider?

If you are a federal contractor, make sure the provider can handle the requirements we discussed in this blog.

Keep in mind the availability and capability of your own staff versus the cost of paying an outside service. Be sure to define precisely what services are provided in what time frame and at what cost.

If you're outsourcing payroll headaches, go ahead and outsource all of them. Federal contractors this may require a "hybrid" approach as described in the data flow diagram above. At the very least, your payroll service should provide a payroll summary, quarterly payroll and tax withholding, a statement of deposits and prepare and file payroll tax returns and annual W-2 forms.

Download AtWork Systems' Managed Service Presentation for an itemized list of its accounting and payroll services.