Summary: Payroll reconciliation is the act of checking that the right deductions have been made on an employee's paycheck to 'reconcile' actual payments with your existing records.
In the context of payroll, reconciliation focuses on ensuring that records of key financial data are accurate by cross-checking different aspects of pay and deductions, as well as compliance considerations.
Reconciliation is crucial in safeguarding employee trust, complying with tax regulations, managing cash flow, and even maintaining the financial integrity of employers. With this in mind, the process plays a core role in keeping the financial competence of a business to a high standard.
How Reconciliation Works
Reconciliation in payroll is the process of verifying the salary owed to employees on behalf of a business, taking tax deductions and other withholdings into account.
This process doesn’t simply ensure the accurate payment of salary but also accounts for every dollar that’s paid by the employer to the employee or the relevant tax body. Primarily, reconciliation focuses on comparing payroll data with bank statements and various other financial documents, such as the general ledger, to scan for discrepancies and maintain a degree of financial integrity for the business.
Undertaking Reconciliation
There are many different approaches that employers can take when it comes to undertaking payroll reconciliation, but the following steps offer a relatively straightforward guide to how the process works:
Monitor the Payroll Register
The payroll register features key details about employee salary considerations over any pay period. information like names, departments, and employee numbers, are accompanied by data insights on hours worked, pay rates, benefits, deductions, and gross and net pay.
The payroll register will also alert employers to discrepancies surrounding employee department changes, errors in hours worked, and pay changes.
Approve Timesheets
Next, employers can review and approve employee timesheets, monitoring whether their hours worked align with their scheduled time. This process is typically automated by most companies using payroll software.
Cross-Check Pay Rates
Employers must also check the pay rates for employees. This can help to identify changes in hourly pay, whether an employee has received a raise, or whether any shift premiums apply. Checking pay rates can also help to uncover whether an employee is due overtime pay.
Assess Deductions
Reconciliation also involves employers assessing what deductions must be taken from employee pay. Typical deductions relate to income taxes, insurance or other benefit contributions, 401K or pension contributions, and various other pre-tax expenses.
Submit Payroll
After deductions are cross-checked, employers can then submit their payroll. This part of the process should be made easier by implementing strong systems for the monitoring of pay and tax obligations of employees. In submitting payroll, businesses can then create and distribute paystubs to the relevant staff and departments.
Update Records
Finally, the employer should update the company records of payroll distributed. Here, employee wages should be treated as an expense, while deductions can be considered as credits.
FAQs
Reconciliation is especially important when it comes to employers ensuring that they pay their employees accurately and in compliance with relevant tax regulations. Any payroll errors will be flagged in the reconciliation process, helping to prevent instances of fraud while maintaining a level of financial integrity for the business.
Employers should allow time for reconciliation at every pay period prior to payday to ensure that all paystubs are accurate at the time of creation. These should also be quarterly considerations aligned with Form 941 submissions, as well as annual reconciliation processes to oversee the accuracy of W2 forms.
If an employer finds a payroll discrepancy during the reconciliation process, an investigation should be launched to determine the root cause of the error. The affected parties should also be alerted to the error and informed of whether they’re in line to receive the correct funds, if applicable.
Any employees affected by a payroll mistake should be immediately notified and informed of the steps being taken to resolve the issue.