What is a payroll reconciliation?

Payroll reconciliation definition and meaning

Payroll reconciliation is a process in which businesses check payroll amounts and records to ensure accuracy. It requires them to review a variety of payroll calculations, including gross pay, taxes, deductions, and net pay. Through payroll reconciliation, you can detect discrepancies and avoid payment mistakes, which may eventually lead to tax penalties and other expensive issues.

Purpose of payroll reconciliation

While payroll reconciliation can be time-consuming, it’s important for these reasons:

• Accuracy: The main goal of payroll reconciliation is to ensure employees receive timely, accurate payments.
• Compliance: By reconciling payroll, you may catch discrepancies related to employee compensation and payroll taxes and in turn, become more compliant.
• Fraud: Since fraud may occur during the payroll process, reconciliation can be an effective way to prevent it.
• Consistency: Reconciling payroll can contribute to consistency between financial transactions, data, and bank accounts, reducing the risk of inaccuracies and the challenges that come with them.
• Retention: If your employees get paid correctly, you can improve retention and reduce the risk of dissatisfaction that may cause them to seek employment elsewhere.
• Reputation: A well managed payroll can protect your reputation and ultimately improve your company’s performance and growth potential.

Performing payroll reconciliation steps

While the payroll reconciliation process varies by company, it usually involves the following steps.

• Gather payroll records: First, collect timesheets, attendance records, and other relevant employee data that reflects hours, overtime, or leaves. Organize these records by pay period so you can easily check them and cross-reference various pieces of information.
• Confirm hours worked: Next, carefully verify the hours your employees worked. Make sure reported hours match agreed-upon work hours as well as overtime.
• Verify wages: Then, make sure the wage rates for each employee are accurate. Don’t forget to assess changes in rates, bonuses, or other compensation that may impact overall payroll calculations.
• Calculate gross wages: Once you’ve confirmed hours worked and wage rates, it’s time to calculate gross wages. Multiply the hours worked by the wage rates for each employee and include additional earrings like overtime pay and bonuses.
• Deduct statutory withholdings: Next, deduct statutory withholdings, which may include taxes, Social Security, and other government required withholdings. To ensure accuracy, you’ll need to stay updated on current tax laws.
• Deduct voluntary deductions: Subtract voluntary deductions your employees may have chosen. The most common voluntary deductions are for 401(k) retirement plans and health insurance.
• Calculate net pay: Then, subtract total deductions from the gross wages you calculated. These figures represent the amount your employees will find on their paychecks after all the withholdings are accounted for.
• Compare with bank statements: Next, compare your results with your bank statements. The amounts withdrawn from your account should match the payroll figures.
• Investigate discrepancies: If you find any discrepancies, it’s your job to investigate them by collaborating with other key stakeholders or departments. This way you can make the necessary corrections.

Keep in mind that investing in a payroll software can simplify payroll reconciliation, saving you time and money.

What calculations are being completed during payroll reconciliation?

Number of hours worked is the simplest calculation in the payroll reconciliation process. To find this figure, multiply the number of hours worked by the compensation rate. For example, if you have an employee who works 40 hours in a two week pay period and their hourly rate is $50 per hour, you’ll multiply 80 hours by 50 to arrive at $4,000. Keep in mind that in this scenario, you’ll need to calculate withholdings and deductions so the employee’s net pay will be lower.

How often should you reconcile payroll?

Payroll reconciliation is not a “set it and forget it” consideration. In fact, you should perform it on a regular basis. Ideally, you’d reconcile payroll during each payroll run, a few days before your employees receive their checks. You should also complete payroll reconciliation quarterly, before you send in your Form 941 and at the end of the year, when you print your W-2s. This can help you ensure that your total payroll expense aligns the information that appears in your general ledger.