Payroll Health Check – how to set up your payroll for the future

What is a Payroll Health Check?

A Payroll Health Check is a systematic review and assessment of your company’s payroll accounting. The goal is to identify risks, correct errors and set up payroll to be fit for the future. 

We take an all-round approach with the motto “prevention, not reaction”. We place our main focus on practically carrying out your internal policies and remuneration models in operational payroll. 

The result is a risk assessment that includes recommendations for action and, if needed, support for your payroll department with making corrected returns and a review of historical payroll periods. 

How does a Payroll Health Check work?

A Payroll Health Check is a structured process and ideally follows on from a Payroll and Social Security Health Check, or they can be combined as modules: 

1. Kick-off with scope and goal

The first step is to establish a common goal and to agree the expectations that the Payroll Health Check is to fulfil. There may be specific recommendations for action from previous Health Checks, the implementation of which should be checked. 

2. Collecting data and documents

Depending on the goal, we define a sample in advance and review the following documents: pay slips, payroll tax returns, contribution statements, wage journals, wage accounts, personnel cost reports, personnel master data, employee documentation, wage  code figures, accounting vouchers, payment summaries, refund applications under the Expense Compensation Act [Aufwendungsausgleichsgesetz–AAG], payroll tax statements, social security reports according to Data Collection and Transmission Regulation [DEÜV], wage statements for the employers’ liability insurance association (accident insurance), disability levy, and other notifications to public authorities.

Alongside reviewing your payroll reporting, we also recommend reconciling payroll input with payroll output – especially to check whether all the supplied data, including that from other departments, has been included.  

3. Process analysis

For the sample we define, we particularly focus on analysing the accuracy (particularly regarding wage codes) of the following issues relevant to statements in coordination with our Tax Advisory and Global Mobility Service Lines. 

• Implementation of benefits in kind (incl. company cars, company bikes, employment share plans)
• Wage codes for benefits and lump-sum taxation (incl. company events, meals, gifts and vouchers)
• Tax exemption of daily allowances and reporting within payroll tax statements
• Correct statements for one-off payments (incl. severance pay and bonuses)
• Regular pay elements (incl. salaries, hourly wages, premiums and commissions)
• Premium policies on capital-forming assets and old-age pension schemes
• Seizures, loans and chamber of commerce contributions
• Special types of employment (e.g. Minijobs, working students, work placements, shareholding directors, employed retirees, pension benefit recipients)
• ELSTAM reporting (including child data and contributions to private healthcare and long-term care insurance and secondary employers)
• Breaks in employment (sickness benefit, maternity leave, parental leave and sabbaticals)
• Special wage models such as Sabbatical, credit agreements and partial retirement
• Cross-border employee issues such as Expats and DTT-salary (Double-Tax-Treaty)

Grant Thornton Germany reviews these documents and ”hot topics” for anomalies with regard to calculating payroll tax and social insurance as well as gross and take-home pay.  We are primary using DATEV programmes and are able to simulate a test environment for specific cases. We check that wage codes have been allocated correctly and evaluate whether the stated figures have been included in the correct fields in payroll tax returns and statements and in pay notifications to the employers’ liability insurance association. Sample pay slips are reconciled with employee documents and contracts. 

4. Assessing risks and potential

The results of our analysis are presented and discrepancies pertaining to individual samples can be expanded to include all issues of the same nature. If any errors are found, we’ll support you in performing a root cause analysis and check your payroll software and interfaces for the issues. Digital notification processes and special rules, which are on the increase, require a reliable process and system landscape in payroll in particular.

5. Results and recommendations for action 

Following this, we then give you our recommendations for action and show you exactly what adjustments need to be made where risk-related operational errors can be found. We will be glad to support you with adjusting your payroll accounting and making any adjusting returns. If there are widespread or serious problems that mean that payroll cannot be continued in its current form, Grant Thornton Germany can take over your payroll for you as an outsourcing partner. 

The value to you at a glance

• Liability risks are minimised – errors are identified and resolved, ideally by the next payroll tax or social insurance audit
• A reliable basis for decision-making – modifying or outsourcing processes
• Training for your HR and payroll departments – areas of uncertainty are resolved and processes stabilised
• Staff are satisfied – wages are paid correctly and on time

A well-structured Payroll Health Check makes it clear where risks lie – and where there is potential for optimisation. This gives businesses confidence in their practical implementation and a reliable foundation to develop their internal payroll further or to decide on whether to outsource payroll. 

Combined Health Checks – why issues interfacing with other types of tax should be included

Starting from the Payroll Health Check, it is imperative to check other types of taxes here, too. Reviewing payroll tax and process optimisation is the first step towards ensuring that taxes at the company are being paid correctly and in full.

The numerous interfaces, e.g. with VAT and social insurance, means that ideally these should also be correctly recorded. 

The benefits to you: since the responsibilities for these issues within the company overlap, the contact persons for multiple types of tax are only involved once. This means that a minimum of internal resources is tied up, while several areas of tax risk are considered at the same time. Experience shows that considering interfaces in this way optimises internal processes and reduces risks. 

Examples of interface issues include those between payroll, payroll tax and VAT

• Company events
• Gifts
• Hospitality
• Tickets for events for staff and third parties
• Private use of company cars/e-bikes

Although the two types of tax and social insurance share much in common, recognition in tax law is sometimes completely different. VAT often follows recognition and rules of payroll tax, such as recognition of official benefits in kind and thresholds for gifts. But in other cases VAT goes its own way, such as for the assessment basis for car use.

While VAT bases its calculation on the full gross list price, in payroll tax reductions apply to hybrid vehicles (50 percent of the gross list price) and completely electric vehicles (25 percent of the gross list price). There are also differences for journeys home: while in payroll tax one journey per week is tax-free, in VAT the first journey home is already subject to VAT.

Practical challenges: communication between HR and the tax department concerning sensitive data 

Because staff data should be treated sensitively (data protection), in practice communication between interfaces is often difficult. Although the data is sensitive, the correct taxation must be ensured for payroll tax and VAT purposes. Ultimately, all the effects other types of tax have on payroll must be recorded properly, because only then can it be ensured that payroll accounting is correct.

The value to you at a glance

• Additional confidence across all the involved types of tax
• Interface risks are identified that are often overlooked in individual checks
• Potential to optimise VAT, customs, payroll tax and social insurance
• Cost savings from better designed systems and processes
• Highly robust in a tax audit