Understanding Payroll Deduction

Payroll deduction has long been a mainstay of a credit union's relationship between its sponsoring companies and its members. Prior to the advent of ACH, it was the standard means for employers to deposit employee payroll funds directly into the employees' credit union accounts. It is still the method used by some organizations and their credit unions to handle payroll direct deposit.

The CU*BASE Payroll Deduction system keeps track of the various deposits that will be received from the company, and the member accounts to which these deposits should be directed. The system can also keep track of distributions that members request, so that funds from the initial payroll deposit can be directed to a loan account, savings or checking account, etc. This list is used to post the payroll funds to the member accounts every time a payroll check is sent to the credit union.

One of the key components of the CU*BASE Payroll Deduction system is the need to balance the payroll before posting it to member accounts. This involves matching the information provided by the company to the data stored on the CU*BASE system, to ensure everything gets posted to the correct accounts and in the correct amount, so that what is posted matches what was actually received.

Terminology

Term	Description
Base Deposit Account	The account to which the initial deposit of payroll funds is made. From this account, funds can be distributed among other accounts. IMPORTANT: To make it easier to balance the payroll, it is recommended that the base deposit account be that account which will receive the net amount of payroll funds, for paychecks that are not always the same amount each period. For example, John Smith gets paid each week, and wants some funds to be deposited into his wife's savings account, a payment made on his car loan, with the balance of funds into his checking account. Because his weekly check can vary slightly from week to week, the base deposit account would be set up as his checking account, with distributions to both the savings and loan accounts.
Distribution Account	Accounts to which funds are transferred from the base deposit account. In the example above, John Smith's payroll would be deposited into the base deposit account (his checking account), then distributed to his wife's savings and the loan account. All remaining funds would stay in the checking account.
Master File	The master payroll records stored on CU*BASE to keep track of payroll data for each organization and member receiving funds through payroll deduction. This file contains Payroll Group default settings as well as history for each payroll that is received. Each time a payroll is posted, this file is updated with the latest information on members and their payroll distributions.
Work File	A “working copy” of the master payroll file, created to allow adjustments to be made to individual payroll amounts before posting the payroll to member accounts. Once the payroll is posted, all of the changes made to the working copy are also made to the master file, and the work file is deleted. The main reason a work file is generated is so that if changes are made in error, the work file can be deleted without affecting the master records. No permanent changes are made to the master file until a payroll is actually posted.
Payroll Group	A record created for each payroll that will be transmitted to the credit union. The Group record stores information about the company, default parameters for handling the paperwork, and details about all employee payroll deposits and distributions. A Group is set up for each payroll that is to be sent, and there may be more than one Group per company. For example, a company might have one payroll sent monthly for salaried employees, with another payroll for hourly employees, sent weekly.
Batch Post	The process of posting multiple payrolls, which have already been balanced, at the same time. Batch posting can also be used so that a payroll can be prepared and balanced in advance, and then posted as of a scheduled post date.
Warehouse	A storage location for payroll work files which have been balanced and coded with a scheduled post date. These payrolls are then posted using the Batch Post process.

Using Payroll Processing: A Brief Overview

The following is a brief overview of the steps required in handling a company's payroll, including the initial setup and maintenance, as well as the regular procedure that is followed each time a payroll is transmitted.

Initial Setup

The first step is to make arrangements with the company or organization that will be sending the payroll and plan the format and procedure that will be used whenever a payroll is transmitted. Each company may set up a slightly different arrangement, depending on their capabilities. Some facts to pin down during this planning stage:

Media - How will the data be transmitted (printed list, magnetic tape or diskette, etc.)?
Format - How will the data look (sort order and contents of list)?
Timing - What is the payroll schedule (when sent, when posted)?
Distribution - How do employees want their paychecks distributed (account numbers, distribution among accounts, etc.)?
Maintenance - How will changes and additions be communicated (paperwork, timing)?

Using the information gathered, set up the Payroll Group record with all appropriate default settings.

A Payroll Group might be the company's complete payroll (if the company sends its entire payroll in one batch), or the Group might represent all the salaried workers who get paid monthly, with another Group for hourly workers who get paid weekly.

For each member that will be receiving payroll deposits, set up a base deposit account record and, if necessary, distribution records. These records store information about the normal deposit amount and the accounts to which the member wishes the funds to be deposited.

Processing Payrolls

When a payroll is received, the data transmitted by the company must be balanced against the database records.

In this stage, a work file is created, either by the credit union or by CU*Answers (see below for details on payrolls transmitted by tape). Data is pulled from the master payroll database and copied to a temporary location called the work file. The work file is then compared to the transmitted data. Adjustments may need to be made to individual paycheck amounts, or names may need to be added/deleted from the records to make the amounts balance to the company's records. In addition, distributions among a member's individual accounts may be adjusted during this stage.

Once the payroll is balanced, it can then be posted to member accounts. Single payrolls can be posted manually, one at a time, or one or more payroll work files can be dated and “batch” posted as of the effective date. Following is a synopsis of what takes place when a payroll is posted:
- The system debits the G/L account designated in the Payroll Group configuration as the Check Clearing GL Acct, and credits the appropriate Member G/L account. In addition, distribution transfers are made between the various member accounts.
- Any adjustments made to the work file will overwrite the master payroll records (to update the database for the next time a payroll is received), and the work file is deleted.
- The following reports are generated:

· Payroll Deduction Transaction Register - Posting

· Payroll Deduction Transaction Register - Recap

· Payroll Deduction Transaction Register - Errors

· Payroll Paid Up Loan Account Register - Posting

Finally, the payroll check is posted to the General Ledger as a Miscellaneous Receipt. This can be done via the normal Teller M/R screens, or by using a special Payroll Miscellaneous Receipts screen.

Payrolls Received on Tape

If an organization transmits a payroll to CU*Answers via magnetic media, such as a tape or diskette, CU*Answers uploads the information and creates the work file by merging the database records with the data transmitted by the company. (Self-processing credit unions also handle this process internally.)

Because the figures from the tape will be automatically fed into the work file, there is generally very little balancing required beyond adjustments to distributions and any additions or deletions required.

Reports

Two reports are created automatically when a tape payroll is received and the work file generated by the system. The totals from both reports combine to equal the total payroll. The OUTQ Report Control feature is used to control whether these reports are printed..

Payroll Transmission Processing Register

This report shows all of the payroll base deposits that were included on the tape.

Payroll Transmission Exception Register

This report shows any exception items which could not be matched to the master payroll file.

IMPORTANT: It will be necessary to research these items and manually enter them into the work file in order for the payroll to balance.

“Base Payrolls” vs. “Distributed Payrolls”

The most common method for handling payroll deduction, and by far the easiest to manage, is to set up one base deposit account to receive payroll funds, and then to distribute those funds among other accounts according to the member's wishes. This is sometimes referred to as a “Distributed Payroll” because funds are distributed by the system from a single location (the base deposit account).

Another method for working with payroll deduction, although less common, is referred to as a “Base Payroll” because a separate base deposit account record is set up for every account to which a member wants payroll funds directed. With this method, the company is responsible for reporting the individual amounts to be sent to each member account. Every transaction that is posted is a deposit directly into an account, with no distribution transfers. In addition, the Payroll Group is set up to not allow distributions, and only base deposit records are created.

In the past, some credit unions chose to set up base payrolls to avoid the appearance of transfer transactions on member statements. However, CU*BASE now allows you to set up a distributed payroll but not show the transfer records associated with the distributions. Instead, transaction history shows only the total deposits made directly into each account. (This is controlled with the Create Transfer Records setting in Payroll Group configuration.)

NOTE: If your credit union works with companies that produce base payrolls, you may assign priority numbers to each base deposit account record that is created for a member, to aid in determining where funds should be distributed first (should a payroll be short). In addition, it is possible to set default priority sequence numbers, based on account type, in the Payroll Group.

Base Payrolls vs. Distributed Payrolls: An Illustration

In this scenario, Mary Smith's paycheck is $750.00 weekly. She wants $250.00 to go to her -000 savings, $75.00 on her -786 loan, and the rest in her -001 checking account. The following chart shows how her payroll would be handled, both by a Base Payroll setup and a Distributed Payroll setup:

	Base Payroll	Distributed Payroll
Which member records would be created?	Base Deposit Account records: 1125-001 425.00 1125-000 250.00 1125-786 75.00	Base Deposit Account record: 1125-001 750.00 Distribution Account records: 1125-000 250.00 1125-786 75.00
What would the system do when it posts?	The system would deposit each amount separately, directly into each listed account.	The system would deposit the entire $750.00 into the checking account, then transfer out the savings and loan amounts, leaving the balance in the checking account.
What if Mary gets a raise?	The company would need to recalculate the amount going into the checking account (by subtracting the normal distributions from the total paycheck) and report the new figure to the credit union. (If the company simply reports the new total paycheck amount, the credit union would need to calculate the new amounts.)	The company would report the new total paycheck amount and the credit union would enter the new amount onto the Base Deposit Account record only.
What if Mary's loan payment changes?	Mary would need to notify her company of any changes to distributions, so that they can report the proper amounts to the credit union. The company would then need to report the new loan payment amount on their records, and recalculate the remaining amounts going to the other accounts.	Mary could contact the credit union directly to make changes to distributions. The credit union would then simply change the distribution record to the new amount.

REMEMBER: With the Create Transfer Records option available in the Payroll Group configuration, you can make a Distributed payroll look like a Base payroll on member statements, while still having all the advantages of the Distributed payroll setup.