Payroll reconciliation verifies that a company’s payroll records match how much it’s paying its employees.
Regardless of your high-tech payroll software and services you use to help you organize payroll and pay employees, mistakes and inconsistencies can still happen, especially if there isn’t a checks-and-balances type of system in place.
Payroll reconciliation is that checks-and-balances system that compares employee pay records with the company’s payroll register to ensure they’re equal. It needs to happen at least a couple of days before you run payroll, regardless of the pay frequency you use, and again before you file quarterly and annual tax forms.
How to Reconcile Payroll in 5 Steps
To start the payroll reconciliation process, you need your company’s payroll register, accounting ledger, and all employee time cards. Using this information, you’ll check for math or information inaccuracies that could result in employees not getting paid the right amount and your company not accounting for those mistakes.
Reconciling payroll takes more time for businesses with large numbers of employees, of course, but the general process is the same, no matter how many employees you have.
Step 1: Review the Payroll Register
A payroll register is your go-to resource for tracking all pay information for each employee.
It includes employee personal information, like their name and Social Security number, gross and net wages, pay periods and pay dates, rates of pay for regular and overtime hours worked, payroll deductions like wage garnishments, and deductions for benefits.
The payroll register also includes employer contributions, taxes withheld for employers and employees, and the type of payment method used for employee pay, like checks or direct deposits.
Mistakes often occur in the payroll register, like not updating an employee’s tax withholding information or calculating the wrong wage garnishment amount from a paycheck. Sometimes, a company could even forget to remove an employee from the payroll register after separating from the company.
During this step, drill down the following:
- Number of employees: First, double-check that all employees listed currently work at your company and that all new hires have been added.
- Hours: Verify that each employee’s hours align with their usual schedules. You’ll dig more in-depth into time cards in the next step, but this quick review can help you notice significant disparities that may signal a closer look when reviewing time cards.
- Pay rates: Is each employee’s pay rate updated for both their regular time and overtime? Also, ensure that any recent pay raises have been updated in the register.
- Taxes and other deductions or withholdings: You’ll dive into taxes and deductions deeper later, but for now, check that each employee’s record lists their applicable local, state, and federal taxes, deductions for benefits, and other withholdings, if necessary. Look through your records, too, to see what changes have been made to employee tax withholdings and benefits to ensure that they’re recorded accurately in the register.
Step 2: Check Employee Time Cards and Pay Rates
Next is a more comprehensive review of employee time cards and their pay rates. This step verifies that all employee time records are accurate and that they’re getting paid at the correct rate. Inaccuracies here directly influence what you spend on payroll, so it’s crucial to get it all right.
First, look over time cards to see if there are any obvious problems, like really high or low work hours for an employee, which could signal an incorrect time punch.
Then, look closer at each employee’s record to find more inconspicuous inaccuracies, like an employee who always works Monday through Friday not including any hours on Wednesday. Perhaps they used a sick day, but it’s also possible they forgot to punch in that day, so you’ll need to find out what happened.
Finally, review pay rates. Have all raises been entered correctly? For employees who work overtime hours, have overtime and regular hours been calculated properly?
If your company has a management team, consider having them help with this process. For example, the customer service manager can be responsible for checking and updating all employee time cards and pay rates within their department by each payroll reconciliation deadline.
It saves business owners or HR some time and adds another layer of verification to the payroll reconciliation process.
Step 3: Review Deductions
Deductions are anything you must withhold from an employee’s paycheck, including company benefits an employee is enrolled in and any local, state, and federal taxes they’re responsible for. Common deductions from employee paychecks include:
- Local and state income taxes
- FICA tax, which includes Social Security and Medicare taxes
- Garnishments for child support or alimony
- Company health insurance
- Retirement plan contributions
- Pension loans
- Union dues
Your payroll register should list every employee deduction your employees have, like the percentage each employee contributes to their retirement plan and the exact amount an employee must have garnished from their paycheck based on a court order.
Check the information in your register with every payroll reconciliation. Review employee tax forms, garnishment notices, and benefit policies to ensure you deduct the correct amounts. Also, use this time to add or remove any new deductions since the last payroll reconciliation, like updating an employee’s record with the new W-4 form they filled out this week.
Step 4: Record Payroll in a General Business Ledger
Your general business ledger holds all financial information for your business, from its revenue to the amount it pays in loans each month. The same information from every payroll you run needs to go straight into your ledger to keep your business accounting up to date.
In your ledger, you’ll include a total of the amount you paid in salaries and wages as a debit. Then, calculate the amount you withheld for each type of deduction, like Medicare or retirement contributions, separately as a credit. These are credits because they’re withheld from employee paychecks for the business to use to pay the IRS, retirement plan, etc.
Subtract all credits from your total wages and salaries to show the company’s actual payroll expenses for that period.
Although you don’t need to list each employee’s wages and deductions for that period in your ledger, keep records for each employee for at least four years, which is the time the IRS requires companies to hold onto them. Even better: Keep them around for at least seven years, just to be safe.
Step 5: Finalize Payroll and Taxes
The final step in payroll reconciliation is paying your employees and taxes. Because you completed all the steps above before this step, every calculation should be correct.
To accurately pay the taxes you withheld from employee paychecks, you’ll need to determine whether you’re required to deposit those taxes semiweekly or monthly.
Assuming your business is new and you haven’t yet filed any quarterly taxes, you’ll be a monthly depositor, meaning that you’ll deposit the taxes you withheld from employee paychecks once a month via an electronic funds transfer (EFT) to the IRS.
If you have filed quarterly before, you’ll look at your filed Form 941 for your lookback period, which starts in July of two years prior and ends in June of the previous year. If you reported $50,000 or less in total taxes during this time, you deposit monthly. Businesses reporting over $50,000 must deposit tax withholdings semiweekly.
If you’re a Form 944 filer, similar rules apply, although the lookback period is for the previous two calendar years.
Don’t forget about other paycheck deductions, too, which may have specific due dates and payment schedules. For example, a court-ordered garnishment will likely have specific rules for employer payments.
Simplifying Payroll Reconciliation
Once you get into the routine of completing payroll reconciliations regularly, they become second nature. Still, calculations can quickly go awry, as a tiny mistake can spiral into other mess-ups quickly.
Think about using payroll software to minimize mistakes and make payroll reconciliation more efficient. Look for one that integrates seamlessly with your accounting software to bridge gaps between your payroll register and general business ledger.