A Payroll (or Salary) Allocation is a general journal entry that moves salary and benefits (or Payroll) expense from the Shared department into the Program, Management and Fundraising departments. It must be done as part of closing an accounting period, before the Shared Allocation can take place. For more on Shared Allocations, see Shared Allocation.
Sutro Li recommends effort reporting as the basis for Payroll Allocations. Effort reporting usually takes the form of time sheets that break down an employee’s work in terms of Program, Management and Fundraising. This data is used to generate percentages for each department, which are then applied to that employee’s gross wages, payroll tax, and benefits expense.
The end result is that the organization fully books its payroll expenses to Program, Management, and Fundraising. Since payroll is typically a major portion of any organization’s expenses, this has a great influence on the Shared Allocation. However, we do not recommend using effort reporting to allocated Shared expenses directly. Most organizations benefit from recognizing their direct costs in the calculation of the Shared allocation, as it helps reduce their TRNA according to their Program activity. Furthermore, auditors typically approve of a combined process that handles salaries separately from other shared expenses, as it is more accurate in terms of isolating cost centers.