Working with an External Payroll Provider or an Internal Payroll Controller

Close to 30 years ago, I worked as a bank teller. This was, hands down, one of the worst jobs I have ever had, surpassed only by my blessedly brief career as a vacuum cleaner salesman. Nonetheless, I did take three important and ultimately influential life lessons out of my time there.

  1. If you are going to be employed in finance, aim for the jobs that pay real money, like accounting.
  2. When it comes to money, like everyone, trust no one. I stole this line from an internal auditor who visited our branch and gave us a presentation which should have been called “Don’t Even Think about Getting Up to any Monkey Business, Because I WILL Track You Down” but which probably had a more benign title along the lines of “Introduction to Internal Audit”.
  3. Never, but never, come between a person and their money.

Today we are going to discuss Rule #3.  To be more specific: payroll.


Proper management of the payroll function means that:

  • payroll and all related benefits are calculated accurately and all payments are made on time;
  • employee questions or concerns regarding payroll are taken seriously, and are addressed and answered completely and in a timely manner; and
  • any errors that occur are acknowledged, are apologized for and are corrected speedily and in such a way to minimize inconvenience to the employee. If there is a delay in correction, this should be discussed and agreed with the employee.

Also critical are accurate and timely submissions of statutory reports to government agencies such as Bituach Leumi, Mas Hachnasah (in Israel), Social Security, Medicare, the IRS and state and local agencies (in the US) and HMRC (in the UK).

Why is this so important?  Well, it depends on what your goals are.

If your goal is to see employee satisfaction and trust levels plummet, come between your employees and their money.  Screw up your employees’ payroll on a regular basis.  Refuse to answer employee questions and/or blame any issues or problems on shadowy figures like “the accountant”, or “the bookkeeper”.  These shadowy figures will naturally never answer employee questions.  When there is an error and the employee is underpaid, blithely inform them that they will see the missing money next month, their budget be damned.

On the flip side, if you are interested in encouraging a positive environment in which employees feel secure that you respect them and take their work and their money seriously, you will want to manage payroll properly.

How to achieve this

Whether you are working with an external payroll provider or doing payroll in-house, the following golden rules apply.

  • Get a professional to do it. This is not the place to cut costs. You can hire someone in-house or outsource it, based on your company’s needs. In particular for small companies, outsourcing may be the right choice and is often not expensive.  When outsourcing, look for a provider that will manage all required government submissions and payments together with payroll.  Of course you also want a provider that is willing to answer employee questions as needed!When doing it in-house, look for someone who is experienced in payroll (with certification if normally required) and who is experienced in dealing with all government submissions and payments.  Here as well…pay attention to personality and willingness to help.
  • Bookkeeping is not the same as payroll preparation. As an addendum to Rule #1.  It’s just not.
  • Provide and maintain payroll data in a consistent manner and according to an agreed time frame. This applies whether payroll is being done internally or externally.  Sit with the provider/ payroll controller in advance and decide on:
    • a template for providing information as well as any supporting information or documents that need to be provided with the payroll data (you can see an example here Payroll Data File);
    • by what date each month the information is to be provided by you for processing;
    • by what date each month you are to receive the calculations back;
    • on which date(s) each month employees are to be paid;
    • how statutory reporting and payments (e.g. income tax withholdings, Social Security or National Insurance and so on) are to be handled;
    • who is otherwise responsible for what; and
    • how employee questions are to be addressed.

A word on deadlines.  Your payroll provider or controller will not be able to give you the same level of quality if you send data over 48 hours before payroll is to go out.  You will find it difficult, if not impossible, to do a proper review and pay employees on time if you receive the calculations for review 24 hours before payroll is supposed to go out.  If your payroll provider is late on a deadline, bring this up immediately. If it happens repeatedly, you might need to change providers.  If you are the one causing problems, look  in the mirror and ask yourself why you are allowing slacker tendencies to come between you and your money, that is, the well-being of your business.

It’s also a good idea to touch base with your provider and and tweak deadlines in months with legal  holidays as these tend to impact staff and bank availability.

  • Establish clear and consistent internal data flows. Avoid information falling between the cracks.
    • Appoint one individual to receive and prepare the payroll information to be provided to your payroll controller or processor. This should be your HR manager or someone high-level; you don’t want the receptionist to know everyone’s salary.
    • Set up procedures for handling new hires, terminations, raises, bonuses and so on. All changes need to make it to the data-collector and all changes should be backed with proper approval (e.g. directly from the CEO, CEO is always cc’ed, signed letter from HR, etc.)  Herbie from R&D shouldn’t be able to write an email saying “I get a raise of NIS 2000 from next month” and have that go through.
    • Set up rules for employees. This would be for items such as expense reports, vacation days, sick days, reserve duty and so on. For example, you can say that expense reports must be delivered to HR by the 15th of the month in order to be included in that month’s payroll.
  • Like Everyone. Trust No One. Review everything.  Ideally, the payroll calculations should be reviewed by a second person.  Points to check include:
    • Review the individual data–match the details per the payroll report against the employee data you provided in the template
    • Take a look at the grand totals—look for items that look off (e.g. an unusually high balance in gifts)
    • Compare individual and grand totals to the prior month. Look for large jumps. While numbers might shift a bit from month to month based on shifting tax brackets, there should never be an unexplained big jump.
    • Double-check any one-off calculations (e.g. a person paid for a partial month)
    • Review and confirm that any changes that were supposed to have been made have, in fact, been made. This could include raises, terminations, unpaid leave, bonuses and the like.
    • Check pension and education fund calculations.
    • After payroll is wrapped up, match up the amounts that were supposed to have gone out the door to employees and government agencies to your bank statements on a monthly basis.

For our review, we use an excel file that I built which compares  reports from the payroll program to our internal payroll data files. Setting this up took a bit of time, but it allows us to check each element of payroll for errors, from salary rates right down to vacation days used, in a thorough and efficient manner. (If you don’t know how to use the SumIF function, learn. It is your friend).

  • Write it down. Your payroll files should include records and documentation of the entire payroll process, including the payroll data file provided to the processor or your payroll controller.  Where there are big variances in someone’s salary, make sure that this is documented either in your review files, in the original payroll data file or both.  Three months from now, neither you nor Yossi are going to remember why you docked him NIS 2,000.  That’s why you want to write down, now, that he took a week’s unpaid leave.
  • If it’s not good, complain. Most payroll processors prefer to hire competent people.  But there are bad apples everywhere—you might get one. If this happens, speak up. Express your concerns (be specific and cite examples) and asked to be transferred to another person.  If they firm refuses OR if you get another bad apple, look around for another provider. There are lots of good firms out there; no reason to stick with one that isn’t.

Hat Tip:  My thanks to Jon Sutcliffe of Kingston Smith for his contributions to this article.

2 thoughts on “Working with an External Payroll Provider or an Internal Payroll Controller”

  1. A well presented outline of the payroll process. For added efficiencies, consider payroll providers that offer electronic onboarding of new hires, electronic file storage of employee data, automated self service options whereby employees or managers can make or request online changes with built in workflow and clear audit trails etc.

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