Embedded Payroll 101: Movement of Funds

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What Payroll Providers Need to Know About the Movement of Funds

Many payroll providers may sigh relief when they have factored in all that can go wrong with payroll calculations and tax requirements and have a system that works smoothly. But there is more to the payroll process than just calculations and taxes. Now everyone needs to be paid. Here, payroll providers will want to provide services that include the movement of funds. And here, more things can go wrong and become messy.

Just as an iceberg hides most of its mass below the surface, the seemingly straightforward act of payroll masks immense and intricate operational complexities. Beyond calculations and compliance, the secure and accurate movement of funds is a critical hidden depth that, if mishandled, can lead to significant financial penalties and operational disruptions. When you embed payroll, you’re not merely integrating with a third-party API; you’re buying the infrastructure behind payroll from a partner, which includes mastering these complex fund movements.

Iceberg graphic showing embedded payroll functions - movement of funds

What is the Movement of payroll funds?

Movement of funds involves transferring the funds acquired by the employee from services performed and their tax requirements to reach the right destination or bank accounts in a timely and predictable manner. It may sound like a minor step, but nearly $9 trillion moves through the payroll system annually. It is the lifeblood of the economy. And if this were to fail, all the efforts to provide accurate calculations of hours and taxes would be for nothing.

What is Involved with the Movement of Funds

The assumption is often made that the movement of funds is merely a transfer of money from the employer to the employee. However, it is a three-party process and sometimes involves additional operations involving the employer, the employee, tax agencies, and financial institutions that assist with the movement of funds.

There are multiple steps in each payroll submission:

Employees’ pay for the period is calculated, and taxes are withheld
Employee reimbursements for expenses that are debited from the employer’s account but receive different tax treatment
Employee tax withholding and employer payroll taxes are paid to the correct agencies by the correct deadlines
Child support garnishments and other ‘post-tax deductions’ from employees’ gross wages must be paid to the correct agency or creditor. With so many steps, there are multiple means for errors to occur.

What Can Go Wrong with the Movement of Funds

Human error is the most common mistake with the movement of payroll funds. For example, bank information can be inaccurately reported during the employee onboarding process. Alternatively, payroll administrators could fail to process payroll promptly, resulting in funds not being transferred on time.

When hours, tips, or any other factor that impacts gross and net wages is incorrectly entered, it can require a payroll correction or reversal, which can also affect the movement of funds.

However, at times, the bank partner can also cause errors. For example, they may have a glitch in their payment processing system that disrupts the transfer of funds, or the banking partner may fail to inform customers about upcoming bank holidays or the predicted time of fund disruption.

Note: If using ACH for transactions, although the system is standard, it is slow. When errors occur, a notice of the error may take up to 60 days after the ACH transaction date for the bank to send a notification of the problem. Therefore, if the funds are transferred to a closed account, or the account number is incorrect, or there are insufficient funds, the party initiating the transfer may be unaware of an upcoming issue for a considerable time.

So, when funds fail to reach the right destination at the right time, either the employee is not paid on time and subjected to the same stress caused when their check is not accurately calculated, or companies face pricy fees for late payments from tax departments. Overlooking these critical elements of fund movement can lead to significant financial penalties, operational disruptions, and a decline in employee trust.

How to Counter Movement of Funds Errors

Here, payroll software that can verify an employee’s bank information upfront during the onboarding process can avoid delays in fund movement by notifying both the payroll administrator and the employee when an error is detected in the keyed-in information. Additionally, these notifications enable the employee and the business to update the information before the end of the pay period.

It is also advisable to work with more than one banking partner. There is always the possibility that one banking partner may be unable to process a movement of funds into employee accounts for unforeseen reasons. Having another banking partner who can pick up the slack when trouble arises makes the process less likely to experience disruptions.

Along with paying employees, the movement of funds involves transferring funds to the correct tax agencies. A payroll provider will want to know what is involved in moving funds to the correct tax agency. With so many agencies, there can also be different methods for transferring funds to them and varying timetables. It is essential to send the correct amount to the right agencies at the right times, and address issues and changes as they arise.

As overwhelming as it all may seem, adding a partner to assist with the movement of funds can also lower the chances of payment disruptions. A company with years of experience in moving money at scale and the staffing to shift resources when a potential disruption could occur provides a robust infrastructure for payroll providers—an added resource and benefit that a partner can pass on to customers.

Key Takeaway

To summarize, the movement of funds is a more extensive process than the employer paying their employees on a Friday. It is essential to stay knowledgeable and up-to-date with all the steps of the process. A payroll provider that offers businesses an efficient means of paying their employees and taxes will save money and headaches.

At Gusto, we have over 12 years of experience with common and infrequent fund movement situations. We have built expertise in all aspects of payroll and have proudly helped over 200,000 customers, performed more than 1 million filings, and answered over 500,000 customer service calls, resolving issues faster and more effectively.

Failure to make accurate tax payments and filing can cost more money than any business wants to take out of their bottom line. It can also affect the reputation of the new provider. To avoid embarrassing stumbles, consider partnering with a company that has proven it can manage tax payments, filings, and compliance at scale.

Learn More about Embedded Payroll

For a deeper dive into the complexities of payroll and a detailed understanding of how to evaluate an embedded payroll partner, read the whitepaper: Exploring the Hidden Depths of Payroll.