AP, Payroll Teamwork Is Essential to Compliance

In every company, accounts payable (AP) and payroll are crucial departments responsible for managing transactions that involve employees and vendors. It is important in these instances that payments are made on time and accurately.

Even though AP and payroll have distinct functions, collaboration is key to maintain compliance with legal, regulatory, and internal requirements.

Collaboration and communication are important to the success of reporting staff correctly to the IRS and taxing payments and gifts given to the company’s workers. There are various areas where AP and payroll overlap including tax reporting, employee reimbursements, and benefits administration (deductions from employees and payments to vendors).

Documenting the policies and procedures AP and payroll need to stay in compliance is a great way to standardize the steps used to submit taxable information to payroll. This also helps standardize payroll transactions that impact AP. Let’s start with the questions we should ask first.

Worker Classification Matters When Paying Contractors, Employees

Are you paying contractors or employees? Defining the worker classification of people working with the company is critical to how you pay them. Upon hiring a person to work, it is important to determine if they are being paid as a contractor through AP or as an employee through payroll. Both departments should be part of the conversation/process of determining what the company’s obligations are for the worker, whether as an employer or a customer.

Knowing Payroll, AP Functions for Company-Sponsored Gifts

Are managers or the company giving gifts to employees? AP is usually aware when a manager has purchased a gift card or physical gift for an employee because they submit an expense reimbursement for it. When AP and payroll work together, AP knows payroll needs to tax specific reimbursements when the employee has received a gift from a manager.

By AP submitting a report after each round of expenses paid, payroll will be able to add the value of these gifts to the next payroll and report the taxes quickly to the applicable agencies. AP also would know the value of gifts given to employees by the company that should be reported on payroll as a taxable fringe benefit. Companies may also need to involve human resources (HR) in tracking gifts to avoid double reporting through payroll.

Items that employees need to be taxed on where AP sees a bill for a vendor and an expense report from a manager include the following:

• Company Awards—When a company honors an employee at a company event with a giveaway (e.g., Smart TV, computer, or car), this needs to be added to the employee’s Form W-2. The fair market value (FMV) of these awards are likely available from AP and payroll needs these details communicated to them to add the value for tax reporting purposes.
• Event Tickets—These could be for the theater or a baseball game, but these tickets have value. With the help of AP, the FMV can be determined and added to the employee’s earnings.
• Gift Cards—Managers could give a gift card for a birthday, anniversary, loss of a family member, birth of a baby, or congratulations on an accomplishment. Generally, a gift card is considered a cash equivalent fringe benefit and its value must be reported on an employee’s Form W-2.
• Reward Program—Employees and managers can recognize other employees for stepping up to the challenge, going beyond expectations, or another reason within program guidelines. These points can be redeemed for gift cards or experiences which would need to be included on the Form W-2.

Note that AP may not be the only department aware of these gifts going to employees. HR could be notifying AP and/or payroll as well. It is essential for all departments to know why it is important for payroll to know about gifts.

How Payroll, AP Can Balance the Budget

Are you working with AP to fund payroll? There are times when AP and payroll use the same bank account for funding expense reports, taxes, and payroll. Even if the account is different, AP may be responsible for transferring funds to the payroll account for payments to come out smoothly during the upcoming paycheck run.

AP is responsible for paying the taxes deducted from employees’ checks and including deductions to offset the company’s cost for benefits offered to employees. Payroll should also let AP know what is needed to fund the 401(k) contributions from the current paycheck and any employer match that corresponds to the contribution.

Together, AP and payroll can work to be sure there is a budgeted amount available for the accounts, but the actual numbers are essential so all payments can be made in a timely manner to employees, government, and benefit providers. Teamwork between AP and payroll is not only beneficial, but also essential to the company’s compliance.

By working together, both departments can ensure accurate financial reports, avoid costly mistakes, and build toward the goals of transparency and accountability. There are numerous ways to be sure your efforts are not wasted. Here are some suggested ways to keep your strategies developing throughout the year:

• Compliance training will help the AP and payroll teams understand laws and regulations that are impacted by the steps taken to report accurately
• Document your policies and procedures clearly. Evaluate these documents for clarity and ease of use. Develop workflows that define requirements and solutions but also outline what department is responsible for each step. Compliance checks should also be documented so you can learn from missteps or system changes.
• Internal audits help identify any gaps in the procedures and help determine if there are areas for improvement
• Keep the conversation going throughout the year to improve productivity. Schedule team meetings so both departments can discuss any upcoming payments (especially if an out-of-sequence payroll is happening or the cost of a Forms W-2 processing is upcoming).
• Review the steps you have been working with over the last few months and consider improvements or changes that will continue to streamline your communications

The AP, Payroll Dream Team

Carrie Louise Hovell, CPP, is Senior Manager of Payroll & Equity at Agios Pharmaceuticals where she won the 2024 Payroll Prism Award for best practices in processes. She is a member of PayrollOrg’s Ask an Expert Committee, Board of Contributing Writers, Certification Item Development Task Force (CIDTF), Certification Board, CHAMPS Committee, National Speakers Bureau, Social Networking Committee, and the Best Practices and Small Employers’ Best Practices Subcommittees of the Strategic Payroll Leadership Task Force (SPLTF). She is Immediate Past President of the Washington Metropolitan Area Chapter and is serving on boards for the Virginia Statewide Payroll Conference and New England Payroll Conference.