I’ll explain five practices I’ve seen used by various US companies that you can apply to your company’s year-end R/3 or mySAP ERP payroll process. For an overview of US regulatory reporting requirements and SAP-provided documentation, see the sidebar, “Regulatory Reporting Overview.”

Although the regulatory information in my article is specific to the US, the information about applying HR Support Packages applies to any country.

1. Have a Plan

The SAP year-end letter sent out in September describes its year-end support program for payroll customers — the Year-End Angel program. This free program helps keep you up to date on year-end details and makes sure issues are addressed in a timely manner.

The execution of SAP’s year-end process for US payroll relies heavily on its Tax Reporter functionality. SAP offers Tax Reporter training for users and technical staff responsible for year-end payroll. The class schedule is typically listed in SAP’s year-end letter, and ranges from basic Tax Reporter functionality to more advanced reporting, reconciliation, and payroll adjustment techniques. The classes tend to fill up quickly, so plan ahead to attend the ones that work into your schedule.

Some companies find it helpful to have an experienced consultant onsite, particularly for the first time they process year-end payroll. Not all SAP Payroll consultants have experience with year-end processes, so it is good to make sure that whomever you select has demonstrated that experience. Just as year-end is a busy time for payroll departments, it is also the busiest time for SAP Payroll consultants, so schedule their time in advance. If you wait until November or December, you may have trouble finding qualified consulting assistance.

In addition to planning the training and scheduling consulting assistance, most companies find it useful to have a year-end checklist or project plan. In it, they detail all the steps involved as well as the due date and owner for each step. Much of this is external to the technical SAP system. For example, you have to define and communicate the year-end schedule, purchase and test special tax forms, collect and enter data from external agencies into your system for W-2 reporting, and verify and correct payroll data.

2. Apply and Test Year-End Updates

The year-end updates are delivered in three phases, two of which ought to be seen as required. The first phase is a year-end HR Support Package (HRSP). The required HRSP level for each version of SAP is described in the year-end letter. Getting to that level is required for year-end processing support. The year-end HRSP is typically released in early October, which gives most companies plenty of time to test and apply it before the end of the year. If you use SAP Payroll for other countries, their year-end changes are released in later HRSPs. It’s not uncommon to have HRSPs released in December that are required for year-end processing outside the US. The anticipated HRSP schedule for all countries is available on SAP Service Marketplace at service.sap.com/hrsp. Click on the Documentation link at the bottom of the page.

The second year-end update comes as a transport, typically in late November or early December. Some tax authorities release their year-end regulations late in the year, and this transport includes those changes. It may also include corrections to the initial year-end HRSP.

The third phase of updates entails ongoing corrections and late changes from various tax authorities. These updates typically require application of the year-end HRSP and the second phase transport and need be applied only if they affect your company.

3. Verify and Correct W-2-Related Payroll Data

There’s nothing like producing employee W-2 forms to show weaknesses in your payroll’s data validity. Employees look at their W-2s at tax filing time, and sometimes their accountants review them. If they see problems, they will call and demand a correction. The IRS and Social Security Administration also have data validations on the W-2 data companies report. Most payroll managers are aware of these data validations, but may not be aware of how to apply them to SAP’s US Payroll.

For example, a common validation is to make sure that employees’ Social Security and Medicare taxes balance out to their respective wage bases. In some cases in SAP Payroll, the taxes can get out of balance with the wages — for example, employees who receive taxable fringe benefits, but have no compensation to pay for the taxes. However, SAP has no standard payroll report to identify employees whose taxes are out of balance from their wages. You can identify the employees, but it takes either a custom report or a download of data into Microsoft Excel or Access for analysis. Each company’s data validations needs to be translated into SAP Payroll terms and then applied to the payroll data. It takes time to analyze and correct the data, so this activity ought to be planned well before December so that it can be comfortably executed before year-end.

If your company is not up to date on its payroll reconciliations, it’s good to get there before year-end. For example, reconciling payroll to FI/CO and to your payroll bank accounts exposes data issues that could affect the quality of your year-end reporting. Again, this activity can take substantial effort, so planning ahead is a key to success.

Finally, SAP recommends clearing all claims before year-end. A claim is the amount of an overpayment to an employee who didn’t have enough money to pay it back. You can clear a claim in several ways — the employee pays back the overpayment, you write off the overpayment to a company expense, you use a combination of repayment and write-off, or repayment is made via a payroll deduction. Claims processing is a complex topic on its own and is described in SAP’s document in “Clearing Claims from SAP Payroll” located at service.sap.com/hrsp. Click on Documentation then Claims Processing.

4. Test and Apply Year-End Updates

Most companies have a three-stage system of change control — from making changes in a development system, to testing them in a quality assurance (QA) system, and finally, to moving them to the production system. It’s often useful to establish a fourth system for HRSP testing. This fourth system is a copy of QA, and has the HRSPs applied to it. Testing this system against the QA system identifies any adjustments needed to your company-specific configuration and possibly any errors in the HRSP itself. Once the HRSP is fully tested, apply it to the development system, along with all the associated configuration changes it requires, and then migrate it through the normal change control process. This fourth system gives companies more time and flexibility in testing, resulting in smoother HRSP application and change control.

When applying any HRSP, always be sure to read the SAP notes that accompany it, particularly for the year-end HRSP. Often manual configuration steps are required, and missing them can cause system errors.

If this is your first payroll year-end, you need to do some configuration for Tax Reporter and claims processing. The Tax Reporter’s users’ guide and the claims processing documents already mentioned describe the configuration steps.

When testing the year-end HRSP, don’t forget to actually print some W-2 forms on real W-2 paper. SAP’s W-2 is configured to print on a Postscript printer, which companies do not always have available. Printer alignment can be critical, so some companies outsource their W-2 printing. If you choose to outsource the printing, be sure to test that interface too.

As Tax Reporter creates employee W-2 forms, it also creates files containing the same data in specific formats to send to the Social Security Administration as well as various state and local tax authorities. The Social Security Administration offers free Windows-compatible software called AccuWage, shown in Figure 1, that you can use to verify that your electronic W-2 file meets common requirements for layout and data validity. Obtain the software and instructions for employers from www.ssa.gov/employer.

Figure 1

AccuWage W-2 validation software

Finally, be sure to do a test run of the first payroll for the next year to determine if any calendars, cumulators, or related configuration are incomplete. It is much easier to find and correct these errors before first payroll date.

5. Execute Year-End Processes

Up to the end of the year, payroll departments should validate their data and identify and correct the errors. After the last regular payroll of the year runs, you should validate the data once more in case new errors or inconsistencies have arisen.

For SAP’s US payroll, there’s no process for closing one year and opening another. It’s a fairly seamless transition because all the payroll periods are date-driven, and those dates tie them to reporting periods. Of course, you cannot do the year-end payroll tax reporting until all payrolls for that year have been completed. But once they are completed, you can run the tax reporting independently from the new year’s regular payrolls.

After your system runs the year-end reports, but before they are sent to employees and the tax authorities, verify that the results are correct. You can do this in a number of ways — via reports from Tax Reporter, random sampling of employee tax forms, or downloading tax files into Excel and Access for analysis. After you make corrections, regenerate the reports.

I’ve presented the whole year-end process for SAP US payroll at a high level. In subsequent articles, I’ll provide more detail on how to plan and validate testing, how to validate and correct the payroll data, and how to execute the year-end reporting process. The important starting point, however, is to make sure your company understands the high-level process for performing year-end payroll processes in SAP.

Steve Bogner

Steve Bogner is a managing partner at Insight Consulting Partners and has been working with SAP HR since 1993. He has consulted for various public, private, domestic, and global companies on their SAP HR/Payroll implementations; presented at the SAP user's group ASUG; and been featured on the Sky Radio Network program regarding SAP HR.

Steve will be presenting at the upcoming HR Payroll Seminar November 7-8 in Chicago and November 27-28 in Orlando. For information on the event, click here.

You may contact the author at sbogner@insightcp.com.

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