Understanding Payroll Function
The Payroll department in an organization concerns itself, primarily with the payment of wages to the employees. However, once you create a payroll department, you are tasking it with more duties than just that. You are tasking it with balancing and reconciling the payroll data while verifying the reliability of the master file, ensuring the proper deductions are made, and the taxes of all your employees are duly deposited.
In a way, you don't have to worry about HR or accounting making mistakes because you have assigned that duty to a separate department. Another important function that this department would serve is to provide you with the relevant data for you to perform variance analysis of one of your highest costs- employee costs.
Confidentiality Of Information
Since payroll deals with payments to employees, the information regarding which happens to be confidential, it is ideal that you assign the reporting to HR. Apart from that, the master file containing all the employee movements, whether laterally or vertically, whether recruits or exits, would fall under the scope of the HR department.
Keeping Track of Employees
Your HR department generally finalizes offers to the recruits, decides VR or exit packages to employees, promotion hikes for those who have moved. All of this data factors in preparing final disbursements to the employees. The master file for this data would reside with the payroll department, which would mean your payroll must report to the HR.
If your organization has a small number of employees, your HR would have closer interactions with your employees. It means you won't require an extensive specialized department, which means that your HR can take care of the requirements of the employees. This mean that the payroll professionals would report to the HR department, which would ideally make this function a part of HR.
HR generally is the SPOC for everything you created your payroll for, which is payment of wages, and other incentives, deductions, with holdings, and other statutory compliance procedures. It also deals directly with the employee calls. That means, on good days, there won't be a glitch when your employee financials are correctly processed. However, on days when there is a problem with the financials of the employees, your HR department bears the brunt of it.
Your organization, and internally, your HR department would be at the receiving end of the legal suit on days that aren't so good, either from the employee's side regarding underpayment of wages, or from the federal authorities regarding incorrect deductions and deposits. Therefore, it makes sense to make this department report to HR.
Is Payroll an Accounting Function?
Numbers and Finances
Payroll can be considered the love child of both the accounting and HR departments. The reasons you should make it report to your accounting department are compelling too. The basic argument is that payroll consists of dealing in financials and numbers, which is the duty of the accounting department.
Knowledge of Technical Know-how
All the deductions required, as well as the calculations for the incentives and the other schemes, require legal and financial expertise, which is not what HR is equipped with. Training HR personnel and handing over the entire department to them would render your accounting department redundant.
Internal Controls and Fraud Prevention:
HR takes care of the employee master, and internal controls dictate that financials as well as the employee master can't remain with the same department to reduce conflicts. Giving control over your entire master file to the HR department would be equivalent to failing the internal controls.
Relevance and Responsibility
The accounting department is charged with balancing and reconciling General Ledger with their transactions, of which employee cost is the highest. That would mean, ideally, this department would report to the accounting department.
Auditing the Transactions
It makes audit easier for the accounting personnel, which is the same argument used by those against this proposal, saying this fails some internal controls to ensure your processes are gap-free. This is one of the reasons you should get your accounting department audited separately.
Restricting Master File Access
Since the accounting department doesn't deal with the employees directly, it makes sense for the HR department to have access to the master file only to edit the employee details and their payment schemes. This would ensure that there are no ghosts, or errors in the master file. This would also help your accounting department link the employee master, payroll master, and General Ledger together better.
Summarizing the Verdict
It makes sense when it is part of the accounting department in case your organization is large, to reduce conflicts as well as keep track of the employee movements since the HR department would have to be significant. However, where your organization is smaller in size, HR and accounting can share the load due to the small size of the employees. These factors, of course, don't consider the internal politics that come into play when either department wants higher power or more significant reporting to boost their visibility. Either way, one great option is to outsource this department so you can focus solely on analyzing the data you receive from the outsourced agency.