This article originally appeared in FEI Canada. It’s an 8-minute read.
A well-run, standardized payroll process is essential to ensure financial statement accuracy, maximum efficiency, tax compliance, and even employee satisfaction.
While many companies outsource the actual processing of payroll, the job of reconciling data between different sources—payroll processor, HR system, general ledger, and bank accounts, to name a few—typically falls in-house.
And it’s often cited as one of the biggest challenges because there’s usually not a robust, repeatable process to address the volume of data and system silos.
But it’s an area that’s under increasing scrutiny, with regulators becoming more direct in advising companies to strengthen their payroll reconciliation processes to reduce discrepancies, increase accuracy, and lower the number of avoidable issues. In many cases, payroll teams don’t know how many misstatements may be buried in the numbers.
Whether your payroll team rolls into Finance, Shared Services, or HR, all typically share the same complaints: spreadsheets, manual processes, lengthy year-end tax issues, time wasted researching and dealing with corrections, and frequent overtime required to get it all done.
These kinds of issues often create significant risks:
- Inaccuracies can get material, fast. Payroll inaccuracies can quickly become material. According to Paycor, for many companies, wages, benefits, and related payroll taxes are typically the most significant expenses incurred, accounting for as much as 70% of total business costs in some industries.
- Potential fraud risk. Poor reconciliation processes can also mean failing to identify incidences of payroll fraud because manual processes inadvertently concealed falsified numbers and records.
- Risk of regulatory penalties. Every year, the IRS and SSA match data across W-2 and W-3 forms, as well as reported employment withholding information. When errors are found, the IRS penalizes for submitting the wrong payroll tax amount and it can be substantial, ranging from 2-10% of total payroll, according to Paychex.
- Significant drain on time and resources. Deloitte’s Payroll Operations Survey found that for companies with thousands of employees, there can be dozens of FTEs involved in managing payroll, and often a substantial share of those resources’ time is spent on manual processes.
This is why payroll automation is often an attractive opportunity for automation, no matter what mix of payroll, benefits, and ERP systems you use, whether ADP, Oracle, SAP, PeopleSoft, Workday, Paychex, Ceridian, Sage, or any other applications.
Payroll transformation projects often stall or never get going due to limited resources, a multitude of cross-functional dependencies, and a lack of ownership or budget. But it doesn’t have to be that complicated.
Reconciliation solutions that are already widely used in other areas of the business, like Accounting and Finance, are a perfect fit for payroll pain points. It’s the secret to streamlining and automating the manual and reactive comparisons, validations, and corrections that occur every payroll period.
In this article, we’re sharing the systems and process issues that hold teams back, areas on which to focus, and examples of leading organizations that have transformed their approach.
Why Manual Payroll Reconciliations Are Painful
- How much time does your team spend reconciling payroll—every period, quarter, and year-end?
- Does the payroll team often work extra hours? Have tax fines or penalties impacted your organization?
- Are W-2Cs common? Are they issued because of errors that could have been caught or prevented?
- Are you required to add or reallocate resources to payroll at peak times to handle seasonal volume or tax deadlines?
- Do you know how much risk is hidden in W-2s?
No doubt, your organization has experienced or is experiencing some of these issues. But these pain points are usually created by the following underlying challenges.
Disparate Data Sources
The sprawl of data across many different HR, Finance, and third-party systems is a significant barrier to efficiently checking that wages, benefits, and tax deductions all tie out. Multiple bank accounts for different payroll types, and supporting documentation that’s stored in separate silos with different formats all create manual challenges.
Adding to the complexity of combining and comparing data is the frequency that’s all required―with weekly, bi-weekly, and monthly pay periods, as well as quarterly and annual tax filings. Together, they form the recipe for an incredibly high-volume, resource-heavy, repetitive process to ensure accuracy.
Multiple Geographies & Jurisdictions
Tax compliance is a significant issue, especially given increased employee mobility across geographies. Each tax jurisdiction often requires different levels of tax withholding, reporting requirements, and year-end processing.
In many cases, payroll is still distributed across the enterprise, with varying methods and technology used to process it.
The sheer volume of different fields and deductions that must be reconciled can be overwhelming. Wages, pay rates, hours/timesheets, FICA, Medicare, state income taxes, workers’ compensation, health insurance, retirement benefits, and wage garnishments all require validation and reconciliation.
And when there are changes in employee elections, updates to tax tables, or the varying requirements of each tax jurisdiction, it’s easy for mistakes to creep in.
Lack of Accountability
The final challenge is that there’s usually limited accountability when errors are found. Depending on where the error is—whether it’s the tax filing, in the general ledger, or an incorrect field in the HR system—different stakeholders must be involved.
If there is no centralized system to manage payroll reconciliations at each stage of the process, issues can quickly bounce between teams.
Strengthening Your Payroll Processes: Where to Begin
With experience from numerous client engagements, we’ve found that focusing on these four key areas can transform payroll reconciliation processes.
Wages & Tax
Performing a fully automated, detailed comparison of federal, state, and local wage and tax information for every paystub ensures that it is correctly calculated for each payroll period, and at year-end for a final W-2 reconciliation―without manual effort.
Variances highlighted to relevant personnel in the team for follow up can ensure the payroll team is focused on the exceptions, rather than checking every transactional detail.
Bank to General Ledger
Regular, comprehensive, and automated bank reconciliations ensure that employee payments are made and posted, and certifies that payments are accurately reflected, both in the payroll expense account on the general ledger and in an employee’s pocket.
General Ledger to Other Sources
This area involves reconciling payroll and payroll-related general ledger accounts—including salaries, wages, bonuses, and equity, along with the associated withholdings, taxes, and employee benefits, and any variances flagged. It’s a meaningful way to safeguard financial reporting and improve the balance sheet substantiation process.
Accrual to Expense
Automatically evaluating all transactions that have run through AP from business expenses and taxable payments to employees and benefit providers reduces the risk of under or overpayment.
Read this Payroll Use Case Spotlight to discover how technology can streamline your traditional, error-prone payroll processes and shift your payroll team’s focus to more value-add activities.