Why do companies use a separate bank account for payroll processing?

Question

Also, how does the required balance for payroll get deposited into the Payroll account from the main account? Is this initiated by the Company or by the Service Organization (e.g. ADP)??

Bonus points: I am trying to understand the payroll process overall. Can someone tell me if the below is accurate, and any details I should be aware of (my company uses ADP by the way)--

- Basically payroll enters changes such as deductions, and change in employee info when it is requested or required
- at the end of every pay period, payroll enters info for hourly employees, commissions, bonuses, etc
- a preview of the Paydata summary report is generated that the managers can review to make sure everything is accurate prior to submitting to ADP
- when everything looks good, they submit to ADP, and shortly after ADP will send them a package with the payroll register, and other information.

Thanks!!!

Answer 1

A payroll processing company, like ADP, will often handle the EFTs for a company. Where I work, there is an automatic fund withdrawal to ADP the day before payday and then they distribute the funds through EFTs to the employees (except those that receive manual cheques.)
A company may prefer to have a separate account for payroll transactions so they are easier to track, but it's not the case in all companies. You would know how much will be withdrawn before hand. That information is in the payroll package you receive after processing, so if there were a separate account, you could transfer the appropriate amount.

What you have described is basically how it works, but obviously will vary company to company. Payroll enters the pay data and any other pertinent info (changes in rates or deductions or employee info, enter new employees etc...) You will have a selection of reports that you are able to print based on the data that is entered. Management certainly wouldn't review all the data entered, but perhaps look totals, if anything. Payroll might scan the data if it's a small company, but probably more errors would be picked up afterward (then you can either do an adjustment or stop the EFT and issue a manual cheque if it's discovered before payday). Then the data gets sent, and usually within a couple of days, a pay package will arrive, with reports (master register, pay register, management reports, etc...) and pay stubs for distribution. Depending on the company, this can arrive one to several days before payday. There will be a deadline for sending payroll to ensure that it's processed on time.

Answer 2

The payroll account is basically an accrual account and most companies use a seperate account because it has a large volume of change every pay period. It also is often seperated to ensure there is no co-mingling of payroll funds.

If the company is doing their own payroll, they simply do an automated transfer of account on the date of record to cut the checks and then have the checks created. The bank will do the cash management transactions to move the individual paychecks to employee accounts (regardless of bank) using EFT.

If they use ADP, they basically move they just transfer the money to the outsourcer, like ADP who picks up the money, runs the payroll, creates the checks or EFT and is done.

As for your process.... spot on. You've definitely got the idea :)

Answer 3

I've used an Operating account and a Payroll account previously. Looking back, it served no
valid purpose. Actually, it was more work making transfers, having separate checks and so on.
Today we use just one account and have less problems.

Answer 4

They do this primarily for accounting purposes. In some cases, it is not truly a separate account. Banks offer businesses linked accounts. The business will have one or more "sweep' accounts with 'zero balance' accounts attached to each. Checks or deposits are processed though each special purpose zero balance account and at the end of each day, the balance is reset to zero by a transfer to or from the sweep account. When actual separate accounts are used, a simple electronic transfer can be used to fund the payroll account.

Answer 5

I don't know about other companies, but I work for a non-profit (in the accounting/finance/HR office) and out of all of the bank accounts that we have, we don't have one just for payroll.

I'm guessing, for the companies that work that way, it's easier for them to keep track of their spending on the payroll, and if it's a company that's in a financial hardship, having a seperate account dedicated for the payroll helps them to ensure that whatever money that comes into that account, is dedicated to the payroll and nothing else. This way, their staff gets paid.

Answer 6

Probably easier for accounting.