Payroll reconciliation is the process of verifying that the records and information supporting a company’s employee compensation is accurate.
In general, reconciliation describes the accounting process that compares two records of the same financial activity to ensure that they match. This helps identify errors, omissions, and discrepancies, and supports the production of accurate and reliable records for business review.
Reconciliation is applied to many different accounting processes in the business environment.
Payroll refers to the process of compensating employees for their work. However, it involves much more than just a paycheck. Payroll involves all aspects of the compensation process, including the preparation of checks, direct deposit, withholding of taxes and deductions, maintaining proper records of compensation, and time management.
A business will want to reconcile payroll to ensure that all transactions specifically involving payroll are properly recorded. All payroll records are kept in a central repository known as the payroll register. In reconciliation, data in the payroll register is checked against supporting documentation to verify its accuracy.
Payroll reconciliation ensures that employees are paid the correct amount and on time. It also supports broader goals and objectives for the business. The data from payroll reconciliation, along with other financial information, feeds into statements which reflect the company’s health and operations. It also supports tax filing and regulatory compliance.
Payroll reconciliation involves a number of steps and comparisons with various source documentation.
The first step involves reviewing data in the payroll register. This is the centralized repository for all information concerning employee compensation.
At the basic level, the payroll register lists all details about an employee’s compensation for a given pay period—including their name, birthdate, social security number, and employee number.
Additionally, the registry should include all detailed information pertaining to the employee’s compensation. This includes the number of regular and overtime hours worked, their rate of compensation, the date of payment, withholdings for taxes, social security, and Medicare, and personal deductions for things like health insurance and retirement plans.
The registry should indicate gross compensation, which is the total compensation before all of the withholdings and deductions are subtracted, and the net pay, which is the actual amount of compensation the employee receives after the withholdings and deductions are subtracted.
All of the above information should be verified. Changes in withholdings and rate of pay can occur from one pay period to the next. Reconciliation is designed to ensure that these types of changes are accounted for.
The accuracy of calculations for the rate of pay and the number of hours worked, or compensation for regular versus overtime hours, should all be confirmed.
Time Sheet Data
Time sheet data should also be reviewed in the payroll reconciliation process. Timecards should be reviewed to make sure that all information is entered properly and correctly. They should also be compared against the payroll register to ensure that the data matches.
Time sheet information involves more than just hours worked. It refers to all detailed information concerning an employee’s work hours and accrued time benefits. This includes paid and unpaid time off, vacation time, sick leave, overtime, holidays, bereavement time, personal days, and service awards.
Timecard data is only one half of the compensation calculation. Once the timecard information is confirmed to be accurate, pay rates should also be reviewed. When an employee receives a raise or a promotion their rate of compensation will change. Overtime rates can change, too. Sometimes a paycheck will include retroactive pay, if a person has a received a raise that is applied to a prior pay period. New employees typically receive a different rate of compensation than their more senior counterparts.
After confirming the rate of compensation, payroll reconciliation should review deductions for their accuracy. All paychecks reflect deductions for social security, Medicare, federal income taxes, and state and local taxes where appropriate. Typically, a company will also deduct premiums for health insurance, pensions, 401K accounts, and workers compensation insurance, as well as garnishments for things like child support or income taxes for those employees who have incurred debt. This information can be verified against the withholding amounts on an employee’s Form W-4. Deductions may also include payments for other employee obligations like advances or pension loans.
Once reconciliation has been completed and all the data is verified, the information from the payroll register can be entered into the business’s general ledger. Payments are recorded as debits, and unpaid liabilities, such as taxes, are recorded as credits.
Payroll reconciliation is an important process that meets a number of business objectives. It ensures that employees are paid properly and on time, which supports employee morale and retention. When employees experience errors on their paycheck it erodes their confidence in the business.
Payroll reconciliation also ensures that the business’s records are accurate. This supports the integrity of the general ledger and other financial statements, which reflect on the business’s health and profitability. These are important considerations for investors and other stakeholders in the business.
Payroll reconciliation also ensures that the business is making the proper withholdings for taxes and other regulatory requirements. This avoids issues with auditors and complications with government agencies.
Payroll reconciliation is typically performed at every pay period, usually a couple of days prior to payday. It is also performed quarterly and annually.
The simplest calculation performed in payroll reconciliation is the number of hours worked multiplied by the rate of compensation. For example, the basic calculation for an employee who works two 40 hour-weeks in a pay period will be expressed as: 80 hours X $25/hour = $2000. However, the employee will receive a lower net pay after withholdings and deductions are calculated.