Payroll Accounting

Perhaps one of the most important accounting functions, at least from the perspective of the average worker, is payroll accounting.The wages an organization pays its employees is the actual amount of money a worker receives from an employer.Real wages represent the amount of goods and services workers can buy with their money wages.

Benefit packages, on the other hand, can represent a major portion of an overall compensation package provided by an organization, and an important function of a manager is to help design a benefits package which will make the organization attractive to potential and current employees, while balancing the economic realities of the costs associated with each component of the package.According to one expert, "Many employers provide insurance coverage, paid vacations, and a number of other such fringe benefits" including Employee Stock Ownership Plans which allow workers to own part or all of a company’s stock.These types of benefit programs are designed to encourage productive work and reward length of service.

Many companies also provide some type of pension program for their employees. In most programs, the benefits depend on an employee’s age, years of service, and average salary. Federal law requires that all pension plans offer vested pension rights to workers who have completed a certain number of years of service. Most employees become fully vested after five years or less of service. Employees with vested rights are guaranteed pension benefits after retirement even if they leave the firm before they retire. However, almost no pension plans provide cost-of-living increases.

There are four main kinds of private pension programs with which the payroll accountant must be familiar. These programs include:

  1. trust-fund plans,
  2. group annuity plans,
  3. profit-sharing plans, and
  4. thrift, or savings, plans.

Trust-fund plans pay benefits from a trust managed by a bank or other financial institution.Money paid to the pension funds is invested in stocks, bonds, and other sources of income.Most of the money is paid by the employer. Many employers who participate in trust-fund plans must pay premiums to a federal agency called the Pension Benefit Guaranty Corporation to insure worker benefits against inadequate funding.Group annuity plans cover all participants with an insurance policy financed either by the employer alone or by both the employer and the employees.The policy guarantees that each worker will receive a monthly annuity (payment) after retiring. Life insurance firms manage most group annuity plans.

Profit-sharing plans are funded by employers, largely from a portion of their annual profits. People may be paid in monthly installments or with one lump sum. Thrift, or savings, plans allow employees to make contributions for retirement.In most thrift plans, the employer matches a certain percentage of each employee’s contributions. Companies typically match 50 percent of an employee’s contributions up to a certain maximum amount.In most cases, an employee may contribute amounts above the maximum matched amount.One common type of company thrift plan is a 401 (k) plan. According to one benefits expert, "Under this plan, all or part of the contributions come from pretax income, and taxes are deferred until money is withdrawn.Withdrawals or loans from such an account are permitted up to a set limit and only under certain conditions.If the employee exceeds the limit or does not meet the conditions, a federal penalty tax must be paid.

Many employers provide a thrift plan in addition to another type of pension plan" (Haveman, 1999, p. 19). A on-going cost-benefit analysis of effectiveness of the pay structures and benefit packages provided by an organization is required to ensure that it is receiving the "most bang for the buck."