Payroll is one of the most critical parts of a company for a couple of different reasons.
First, it is what keeps your employees doing their job. If they don’t get paid, they won’t (and shouldn’t!) work. That reason alone should be enough to make payroll a priority within your company. However, there is s second reason why payroll is so important–it is likely one of the most significant expenses your business has.
To ensure that you are paying the correct amount to the right people, your company must practice payroll reconciliation. This is the process of ensuring that the payroll you’re preparing matches the payroll recorded in your company’s general ledger.
Imagine that an employee was supposed to get a check for $2500, but you accidentally flipped the first two numbers and sent them a check for $5200. That’s a pretty sizeable difference. Or you could have done the opposite and accidentally underpaid your employee. Neither is a mistake you want to make. And you may not catch this mistake unless you do a payroll reconciliation that shows the records do not match.
Even if you are using payroll software or payroll services, you still need to regularly go through the payroll reconciliation process to ensure nothing is falling between the cracks. This helps lower the chances of payroll errors and help you catch them before they happen.
Why Does Payroll Reconciliation Matter?
Payroll reconciliation is a vital process in your company because it ensures that your employees get paid the right amount and your records are accurate. This is crucial to your employees’ happiness in the company and is also imperative to keeping your books balanced.
By putting off payroll reconciliation, you run the risk of having significant errors in your payroll. And if you avoid reconciliation, you will have a lot more work cut out for you when it comes time to submit your taxes. You put yourself at risk of potentially paying some severe fines if your books are not balanced.
What Does Success Look Like?
Now that you understand why payroll reconciliation is one of the most important things your company should do, it’s time to look at what successful payroll reconciliation looks like.
By processing payroll reconciliation, you avoid making mistakes that can cost your company a lot of time and money.
No employee wants to get paid less than they’re supposed to, or even get overpaid and then have to deal with the complications of correcting that overpayment. It is said that nearly 50% of workers claim that one or two problems with their paycheck would lead them to start looking for a new job.
Success with payroll reconciliation means doing it frequently. By that, we mean every pay period before you process employee checks. The longer you wait between payroll processing, the more complicated and messy it gets.
You should also process payroll reconciliation every quarter when you submit your quarterly federal tax return and annually during tax time to confirm that what you have in your payroll data matches each employee’s W-2 form.
By performing payroll reconciliation frequently and correctly, your company’s books will be balanced. This is great for a few different reasons. For one, your employees get paid what they’re supposed to, which is ideal for everyone. Another reason to keep your books balanced is to avoid hefty penalties and fines from the Internal Revenue Service. And third, payroll reconciliation will help your company keep accurate records which can save you serious stress come tax time.
If you aren’t currently doing payroll reconciliation, the thought of it may sound like a lot of work that you’re not convinced is worth it. Let us pull in a real-life example to help you see the importance and benefits.
Izzy’s Brooklyn Bagels is a popular Kosher bakery specializing in (you probably guessed it) bagels. They have been around for over 20 years and have two locations in Palo Alto, California. With employees going back and forth between the two different locations, things started to get complicated.
The general manager found herself spending a great deal of time correcting employee paychecks that were incorrect because employees would go between the two different locations without clocking in and out at each location. This caused the general manager to go back two weeks after the fact and correct mistakes of overpayment because employees weren’t clocking out at one location before heading to the other.
Once the manager found a new way to track hours via a mobile app, she was able to spend more time on payroll reconciliation and catching mistakes before they happened.
One Secret Weapon To Master Payroll Reconciliation
If there is one thing you need to help you with payroll reconciliation, it is a payroll service.
Though unfortunate, paying employees indeed requires a lot more work than simply writing a check at the end of the pay period. There is endless tracking of all sorts of things to ensure that hours are logged properly, employees are getting paid correctly, the check matches the number in the system, and much more.
We advise you to invest in payroll services to help you through the complex process of payroll and payroll reconciliation. There are plenty of options out there when it comes to this type of service, but one that comes very highly recommended is Gusto.
Gusto is intuitive and helps minimize the amount of time you spend running payroll and payroll tax filing. In addition, it works well with accounting software favorites QuickBooks and Xero to help make things even easier.
5 Essential Strategies For Payroll Reconciliation
Now that you understand the importance of payroll reconciliation, it’s time to dive into the strategies to make the process as painless as possible.
Check Payroll Register
The payroll register is where all of the information about your employees’ payroll is listed. It could be housed in something like an Excel spreadsheet or with a payroll service provider. These include things such as:
- Date of birth
- Social security number
- Employee number
In addition to that information, your payroll register should also record all the payroll activity from all pay periods. This includes:
- Hours worked
- Pay rate
- Number of regular hours
- Number of overtime hours
- Tax information
- Employee withholding (social security and Medicare)
- Additional deductions
- Gross pay
- Net pay
The payroll reconciliation process begins with you checking that all of the above data is correct. If an employee has recently made any changes, like they moved or changed their withholding status, make sure that is reflected in the register.
This process is made much easier (and will require less time) if you implement a payroll service such as Gusto. Rather than manually finding all this information (and make all changes) via an Excel spreadsheet, the payroll service will simplify the process of checking that the data is correct and streamline the process of making changes.
By using this strategy in your payroll reconciliation process, you’ll cut down on the errors that end up costing more time and energy in the end.
Confirm Employee Time Cards
Chances are good that there may be some discrepancy between the employee time cards and your payroll register. That’s why you need to confirm that the time cards match what you have in the system and look for reasons for any differences before paychecks and cut and sent out.
Some things that are often missed in this step include:
- Sick days
- Paid time off
- Unpaid time off
- Vacation time
This process is made much easier with an automated time and attendance system. Your employee hours are automatically entered into payroll instead of manually, which can leave a lot of room for human error.
By using this strategy, your payroll reconciliation process will be much easier.
Check Pay Rates and Confirm Deductions
Did some of your employees recently get a raise? Or did you change the rate for holidays? If there are any changes to an employee’s pay rate, you need to make sure that those numbers are current before running payroll or reconciling.
The pay rates determine your employees’ gross wages, so they must be correct, or else you run the risk of over or underpaying and then struggling to correct the mistake. Any error in this step will cause your entire payroll to be off, which leads to additional work for you and potential fines from the IRS.
You also want to be sure to check any payroll deductions. Suppose you have an employee who recently became eligible for healthcare benefits, or an employee who recently changed their W-4 withholding. In that case, you want to make sure those changes are included in the payroll.
By checking pay rates and confirming deductions, you won’t have to worry about backtracking and fixing these mistakes down the line.
Record Everything in the General Ledger
Every payroll needs to be recorded in the general ledger for your company. Often, this ledger is referred to as “the books” since it is where all the financial data is kept.
Ideally, you have payroll software that integrates with your accounting software, making this step much easier. If you have this software, this step will be completed automatically so that you don’t have to do it manually.
The transactions in a ledger are usually categorized as the following:
- Owners’ equity
Payroll is considered a debit, and deductions are considered a credit. By doing this step manually, you end up spending a great deal of time and effort. Save yourself the trouble by automating things with accounting software and payroll services.
Ensuring all information is entered into the general ledger correctly means that payroll reconciliation will be quick and easy with fewer mistakes.
Now that you’ve crossed your Ts and dotted your Is and double-checked everything, it is time to submit payroll and get those checks out to your employees.
This is when you also need to deposit the federal income tax you withheld in addition to the employer and employee portion of social security and Medicare taxes to the IRS.
At the end of each quarter, remember to file Form 941 to show how much you withheld from employee paychecks for that period. This covers income taxes, social security, and Medicare.
Most Common Mistakes of Payroll Reconciliation
Frequently, the more important something is for a company, the more complicated it is. That can be true for payroll reconciliation if not done correctly. There are some common mistakes that companies make that cause the process of reconciliation to become even more of a headache. To help you avoid making those mistakes, we are sharing them with you today.
- Only doing reconciliation quarterly. To make the errors smaller and keep your books balanced, payroll reconciliation should be processed every pay period. And you should do it at least two days before payday. This ensures that your employees get paid on time, which is vital.
- Not using payroll services. Though you can do much of the payroll work manually, it is much easier to use payroll services. The service will also save you a great deal of time, energy, and headaches as it handles deposits, withdrawals, withholding, new hires, taxes, hours, and more. Automated services also leave less room for error, which means easier reconciliations.
Though payroll reconciliation is a process that takes time, it is less stressful and less time-consuming than dealing with the negative effects of not doing it. You save yourself from having to reverse mistakes and getting fined.
The process of payroll reconciliation doesn’t have to be complicated if you implement help in a payroll service. With the proper understanding of payroll reconciliation, you will have balanced books, happy employees, and be free of fines and penalties.