Paul W. Carlson, CPA (00:00):
Hi, this is Paul Carlson, CPA with Law Firm Velocity. In this video, we're going to talk about how we'd like to see law firms run payroll, that we see two common issues with law firm payroll. So first is the payroll frequency, and second is the lag between the end of the pay period and when paychecks are cut.
(00:20):
So in this example page, I know this is a wall of numbers, but we'll walk through it, that at the top we have some example payroll calculations. So we have a law firm with two employees and we can run payroll one of two ways. So one way is to run payroll every two weeks. An example here is we have payroll every other Friday. In this example, total wages is $7,900 every two weeks. The second way we can run payroll is to pay twice a month. So this is where everyone gets paychecks on the 7th and the 22nd. In this case, we have wage expense of $8,500 twice a month. The difference here is there's 26 paychecks a year when you pay every two weeks and 24 paychecks when you pay twice a month, and it's because we have more paychecks under every other week that the pay amount is a little bit less.
(01:17):
So to show examples of why we like twice a month payroll, I have an example income statement. Law firm income statements are run on calendar months. So in this example, we have flat revenue of $20,000 every month. We have the same payroll comes out twice a month. Payroll taxes are the same. And at the end, total payroll costs are the same and net income is the same. That with everything a consistent pattern, it's easy to forecast and we can understand what's happening with the firm.
(01:51):
In this example, we have an example income statement where payroll is run every two weeks. When you run payroll every two weeks, there's always two months within the year that have three payroll runs. And what that does to the income statement is we have an extra payroll in those months, and then in the other months we only have two payrolls. When you look at what that does to total payroll cost is it swings in those two months and it actually pushes net income as a loss in the months with extra payroll.
(02:29):
So when we have controller meetings with firms under this payroll situation is we have to always interpret back that net income is really not that bad because that payroll is skewing the numbers for the month. That under the hood what's happening is the months with two payrolls are only picking up 28 days of wages, so these months have too little wages, and the months with three payrolls, three pay periods, so they're over-reporting payroll. That the simplest solution to this is just to convert to paying twice a month. That gives us the consistency we want for forecasting and just analyzing the financial statements.
(03:14):
The other issue we will see is the lag between the end of the pay period and when paychecks are cut. So say we're working with January 1st through 15th wages, some firms will have payroll set up so there's no lag. So for January 1st through 15th wages, everyone gets their paycheck on January 15th. That means the EFT funding for direct deposit has to come out of the bank on the 14th, and we have to actually run payroll with the payroll service or with our firm on January 13th. So in the best situation, we're having to guess or estimate hours for hourly employees and vacation time taken for two days.
(04:02):
If payday is a Monday and it's a holiday, that the actual check date flows back to the preceding Friday, and so now we're running payroll several days in advance of the actual end of the pay period. To simplify that, we add in a seven-day lag. So January 1st to 15 wages, the paycheck is actually cut January 22nd, which means the EFT comes out of the bank on the 21st, and we can process payroll on the 20th, which gives us a couple of days to collect actual payroll information and we're not estimating and payroll goes much simpler.
(04:41):
If you need accounting help for your law firm, please check us out at Law Firm Velocity. Thank you. Bye-bye.
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