Does Payroll report to HR or Finance?

I have seen payroll roll under HR in most large companies, under accounting in smaller companies that really don't have an HR group per se.

I don't think it makes sense to have payroll under HR given that most in the HR profession are not skilled at the quantitative side of things. I have spent many hours trying to teach finance & accounting to HR personnel.

To me it sounds like the way you have it set up might be optimal.

In organizations that I have been with, payroll usually reported to finance/accounting or to a separate service organization, but never directly to HR. The size of these organizations range to under 100 employees to greater than 100,000. Often, I see HR input benefit changes into the payroll; however, that function can often be provided by the payroll function. For separation of control purposes, I see HR input salary changes and new employee information into the payroll system.

With multi state taxes, deductions, and benefits for larger companies, it is usually more economic to outsource payroll. The complexity, change management, confidentiality, and potential impact of errors create to much risk for the HR/Finance department to keep in house. Outsourcing allows the segregation of duties keeping individual employee information in the HR department, and the cash/accounting in the Finance department.

At our large corp, payroll reports to HR, but it previously reported through finance. It doesn't necessarily make sense, but not everything does at a large company.

Strong internal controls would dictate that payroll report to the accounting or finance department. If the function reports to HR there should be periodic audits performed by accounting to ensure that there are no ghosts in the payroll register.

I have always been an advocate of the processing of payroll being an Accounting functional responsibility. The actual transactional processing and subsequent GL recording of disbursements and related accruals needs to have the Accounting technical competence to perform these accurately and timely. That skill set does not typically reside in HR.

Payroll processing, like AR billing and AP payment processing, has the IT system set up between the Masterfile component and the actual transaction processing. Masterfiles create the basis from which a transaction can be processed, and this function should always be separated from those that actually process the payment transaction, in this case paying employees.

It would be appropriate to have the Payroll masterfile maintenance under the HR domain, and within larger companies this is what you will typically see.

In the real world, and in addressing the question for "over 100 employees", smaller payroll populations will likely have same person maintaining both the masterfiles and transacting the payroll processing cycles. In this instance it is incumbent on Management to have an effective method to monitor these conflicting responsbilities. ADP as far back as 20+ years ago had in their compliment of reports a listing of all masterfile changes made. I'd always review these with each payroll cycle processed.

A real life example of where as the incoming CFO, HR had all payroll processing as a direct report, and it turned out bad.

The payroll person set up in the masterfile a quantity of exemptions that exceeded the maximum allowable number. This was absent the required approval from the IRS Regional Director's office to exceed the threshold (I think the threshold was over 8). The effect was to have zero FIT withheld, increasing the net pay.

Beyond this, when her personal hours input triggered Federal Income tax withholding, she "split" the paychecks, made the first one not have FIT withheld, and made the second check calculate to zero on FIT. This violates IRS reg's for Income tax withholding calculation methods (there are only 2 methods : either based off the "wage bracket tables", or on a flat percentage). The employer is being liable for the correct amount of FIT that should have been withheld, along with penalties and fines for not complying with IRS withholding tax law requirements.

The worst part about this was the HR-VP didn't see this as a problem, she was protecting her employee. It took some time to get this resolved.

The moral to the story is you should separate who has systems access between the masterfile components vs. who can post hours and amounts to disburse payroll (whether manually input or automated), and where this is not segrated, Management should be closely monitoring these activities.

I should also add that I had the Controller calculate all of the bonus/commission amounts, which I oversaw. He would then provide that info to HR for them to process payroll. So again, someone with the access to the info that drove the commission and bonus plans, the Controller, was calculating gross amounts and providing them to HR who did the payroll processing. But no one in accounting other than the Controller (and me of course) was privy to that pay information.

By the way, the company I was at in this arrangement I've described in this post and my last post was a 145 employee company with 4 entities paying payroll and employees in 5 states.

I have led the Finance department in companies ranging from start-ups to over 500 employees, and payroll has always been an Accounting function - even if payroll was outsourced or HR was under my control. HR had master file control for EE status, benefits, etc., but the payroll processing functions always fell under Accounting.

I agree with most commentors that it should be under Acct. but I think the way that you have split controls makes some sense. Either way there is a lot of information that has to be shared between the two functions and it is important to have processes or software that accomplishes that.

Finance/Accounting should manage the financial aspect of the Payroll function while HR adminsters the employee benefit aspect.

I manage the Finance Dept (18 employees), including the payroll function, in a company of approximately 325 employees.

I am an advocate of the Payroll function being within the Finance/Accounting Function, with the master data being with HR, this provides a number of benefits, the primary one being a level of segregation of duties for stronger internal controls.

Also the Finance area tends to be more across all the taxation issues and can therefor better manage the GL implications of payroll transactions for correct accounting, taxation and reporting purposes.

Payroll is a hybrid activity which entails HR, Accounting and Disbursing. The HR portions responsibility should be limited to creating the employee accounts and master records. The actual payroll processing in a large firm (I consider large over 1000) could be contracted out to a third party, with oversight from the Disbursing (Treasurer) and the Accounting Department.

Small firms may not have the luxury of contracting a firm to manage the payroll processing, but at a minimum, there must be a clear separation between the creation of employee accounts (mainly an HR function) and the payment to employees.

There are too many reporting issues and too much cash disbursement at stake for payroll to report anywhere other than through Finance. HR, if managed correctly, has a role to play but that ends when it comes to cash outlays, tax issues, and general ledger implications.

From a segregation of duties and SOX requirements HR should be responsible for setting up the employee, initiating rate changes etc into the payroll system. Accounting's Payroll department will process the payroll, journal entries can be prepared by the payroll department and then reviewed and approved by an independent party. Most larger companies will use an outside payroll service that included an HR module, e.g.ADP, Paychex.

In no circumstance should payroll report to HR (major control issues here). It should be to the CFO or somene nearest to the level. I agree with Charles on the interface with HR on the 'master file' data.

As someone who has been in finance/accounting dept as well as HR dept and straddled both (in several states). I am now satisfied thinking payroll should be in HR; and for several reasons why.

First, The consequences of messing up HR related items is far greater than reporting accouting info (and is not as easy to fix). Second, obamacare benefits are regulated by the IRS. Meaning pay (+benefits) are even more intertwined with HR. Third, it is easy to fix any errors that HR may book to the ledger incorrectly. Of course audits will need to be done by CFO/controller. After all they should be done ANYWAY, no matter if accouting is doing entries.

And why does everyone on here assume that you can't find a full charge book keeper with some HR knowledge?

Hi Liz Amstrong.

I think that it's better to determind proper roles and responsibilities before thinking of job process.

As to my understandings, in payroll area, role and responsibilities should be devided like that:
1. Setting up wage and benefit scheme should be done by HR with professional study
2. Salary level of every employee should be managed by HR for private confideltiality and to avoid negative comparisons among employees
3. The 1st and 2nd roles will lead responsibilities for salary calculation to HR in appropriate with regulations and for confideltiality. Somebody is concerning on PIT calculation. Taxation function can train HR member the way to calculate and hire tax consultacies to check it.
With this responsibilities, of course, HR will report payroll data in detail to CFO for approval. They can prepare necessary information for entry record and payment based on Accounting and Financial guidelines.
4. Recording entry is responsibility of Accounting. Payment is responsible by Finance. Both of them do the job based on summarized data from HR.
5. Responsibility of answering auditors' concerns is done by every Department based on their prepared data.

Hope that my opinions can meet some your concerns.
Be successfull!
Mai.

for control purpose we need to have payroll under HR and the approval of all the statutory checks to be done by finance.
There must have a cutoff point there in where finance has to come in and where HR has to seat aside.

Jeff is absolutely right here. Payroll should report to finance as it involves not only the payment adjustments and instructions but also significant contributions to managing the yearly Pay budget.

In our company about 1,000 employees, Payroll reports to Finance and HR inputs Benefits, Pay changes, etc. Reading through these responses I agree the skill set is more closely matched to Finance for the Payroll function. I also agree that is not a one or the other; these two departments in large companies need to work together to have success.

Had a bad experience with payroll under HR. Anyway who does understand accounting outside of accounting department, and with the number of accounts and reconciliation that have to be done. HR provides the right information when hiring, and most important has a clear process with employee termination.

We have a small nonprofit organization (<350 employees at the height of our camp season) and utilize ADP. Since ADP processes the payments I find it more beneficial to have payroll under HR. However, currently it is under Finance. Finance is not equipped to know who is coming and going, what benefits they should have or other HR issues. The current ADP system, along with human error, makes it difficult for Finance to stay on top of the changes in staff, benefits, etc. HR knows all this because they process it.

My ideal situation for this organization is having someone in Finance process the ADP payments with HR input and have HR review the ADP reports prior to submitting to ADP. The Controller or CFO should routinely review the records but should not be involved in the payroll process itself. HR has or should have all the training necessary to understand the effects of ACA, retirement funds, federal taxes, benefits, etc. The finance/accounting department has other ways to review including variances to budget, routine review of payroll records and auditing new employees and other changes.

Payroll is an accounting function in my opinion. With payroll usually being the largest regular cash outlay it demands a higher level of internal control and internal/external scrutiny that the Accounting organization normally is uniquely equipped to handle. That doesn't mean HR shouldn't be a major stakeholder with shared responsibility for getting it right. HR owns the front end and back end of staffing and benefits, so they are the information source. Accounting verifies and records the transactions and manages the cash flows. Structuring HR responsibilities with the proper skill sets, policies, and internal control will make the processing of payroll by accounting more efficient and accurate. A larger resource allocation upstream to HR may be the right choice.

My humble opinion....

If time keeping and VL/SL or PTO availment is computerized and entrusted to personnel (I know, this is a different issue/paradigm altogether) the issue of where payroll is under (Finance or HR) is not going to be an issue or at least not much of a problem.

The responses here have all tackled the "symptoms" or "effects" (accuracy, accounting knowledge, etc) of the problem but NOT the problem.

Finance dictates where each employee belongs to in a company with the budget that Finance creates. Payroll is simply recording the costs of the manpower/employee benefits following the budget format. HR ensures that each employee belongs to the correct bucket in the budget when they add/place them in the payroll system. To answer Payroll is the middle man that should answer to Finance because they are in-charge of recording the costs to the books at the end of the day.

in most cases, payroll should report to Finance. It is a financial transaction. Of course, HR should have "need to know" access to information.

I agree with most response, it should be under the finance/accounting Dep.
the HR should be responsible for master data for the employees, follow up the attendance for employee, and the overtime.
the accounting department, responcible to convert HR data from Hours to many, and make the proper entries

I have never seen payroll under HR. Payroll is derived from what HR enters into the system at hire and thereafter. The two will work together at times with terminations etc. In my opinion, you want to keep the 2 separate. Generally HR people are not numbers people and are not aware of the strict legal and audit procedures payroll must follow to be in compliance. HR should only be responsible for the personnel and benefits related data entry and any thing related to the employee's transition through the organization. Payroll should be accountable for making sure employees are paid correctly, on time, and should answer to finance around any legal and compliance related items. This also allows for a good separation of duties with who is entering pay changes and who is processing.

Finance/Accounting all the way. Finance needs that information for forecasting, Accounting needs it for booking into the right departments/accounts. HR is aware of everyone's salaries, and pass that along to Finance/Accounting.

Not to seem repetitive, but HR is in charge of DOL Compliance and the administration of benefits.

Thus, while certain payroll issues may go to HR and as Jeff Taylor pointed out, they may do some data entry into the payroll system, Payroll and the entire HR shop ultimately reports to the CFO.

Sure there are a bunch of dotted line reports depending on how big the shop is, but at the end of the day, financial or accounting data is the domain of the CFO.

Very insightful. I'm the only HR exec here (with no willingness or desire for payroll) and found this very enlightening. Thank you all. Jo

I work for a large Midwestern municipality and they have payroll reporting to HR. It does not work well, because HR does not understand the accounting side of things and do not set up the accounting entries correctly (it is a large ERP software program). Finance cannot get payroll to fix these things and HR doesn't understand them. In the big picture, payroll is all accounting, so it should report to accounting/finance.

This is one of the areas where I would suggest there is no "right" answer. I have seen this structured many ways, and I think the answer really depends on how the company is set up and the internal resources available.

Some companies use their HRIS system to process payroll, it which case the taxes are usually auto-calculated, so the necessity for Accounting handling this function is substantially smaller.

For companies that process in-house, and do not have the benefit of a robust HRIS system, they likely need Accounting to be much more involved due to calculations for taxes, etc.

However, it is also relevant to think about company size and complexity as well.

A multinational company with expats and foreign work assignments makes for an incredibly complex payroll, and it is usually HR and legal that are the most aware of all the pay nuances involved in this type of situation. As an example, I have yet to work with a Controller based in the US, who understands how to do the salary gross-ups for the Swiss employee, paid in US dollars, working in Brazil, on a visa. (actual scenario)

That said, strictly domestic companies may prefer Accounting to handle payroll, to ensure state, and local taxes are correctly considered if their HR person/dept/group is less aware of the various taxation issues.

Additionally, for companies that are publicly traded, the SEC has extremely specific requirements on the division of labor between who is responsible for modifying changes that affect payroll, to whom processes payroll, to whom audits payroll. This division of duties is key.

I believe the idea that HR cannot handle all the many tax, and related calculations, is a fallacy, because a good payroll department WILL know what these are, and have the tools to calculate them - whether this sub-department reports to HR or Accounting.

The challenge I have always faced is that Accounting is usually unaware of the inputs required for payroll, and only HR has that information. Accounting ensures the output is correct, but they cannot guarantee that the input is. Thus, I have seen payroll work best when it is processed by HR, but verified and auditing by Accounting.