How to reconcile payroll: a step-by-step guide

Payroll reconciliation is a critical process that ensures the accuracy of payroll records and helps businesses maintain compliance. By reconciling payroll, companies can prevent costly errors, fraud, and discrepancies that could impact financial reporting. In this guide, we’ll break down how to reconcile payroll step by step, highlighting why it’s essential for your business’s financial health and the tools available to make the process smoother and more efficient.

What is Payroll Reconciliation?

Payroll reconciliation is the process of comparing payroll records against bank statements and general ledger entries to ensure that payments, deductions, and adjustments are correctly recorded. For example, if an employee’s gross pay is £3,000, and after tax deductions and other adjustments, the net pay is £2,500, payroll reconciliation ensures that the amount paid matches the record in the bank account and financial statements.

The calculation for payroll reconciliation involves:

• Gross payroll: The total of all wages and salaries before deductions.
  
• Deductions: Taxes, retirement contributions, insurance, and other withholdings.
  
• Net payroll: The actual amount paid to employees after all deductions

By regularly reconciling payroll, businesses can ensure that no discrepancies exist between the financial records and the actual payments made.

How often should businesses reconcile Payroll?

Payroll reconciliation should be done regularly to maintain accuracy. Many businesses reconcile payroll on a monthly or bi-weekly basis, depending on their payroll cycle. Reconciling frequently helps identify discrepancies early, preventing small mistakes from becoming costly errors or compliance issues.

Why is Payroll Reconciliation important?

Payroll reconciliation is essential for several reasons:

• Accurate and timely payments: Payroll reconciliation ensures employees are paid correctly and on time‍
• Financial accuracy: Regular payroll reconciliation ensures that all payroll expenses, including salaries, bonuses, and deductions, are accurately recorded in the company’s financial statements.‍
• Reduced risk: Regular reconciliation reduces the risk of underpayment, overpayment, or missed deductions. If left unaddressed, these errors can result in costly corrections or fines, damage to the company’s reputation, or legal disputes.‍
• Fraud detection: Payroll reconciliation helps identify discrepancies that may signal fraud or unauthorised transactions. Whether it’s an inflated overtime claim or ghost employees on the payroll, reconciling payroll regularly can quickly reveal irregularities.‍
• Regulatory compliance: Payroll reconciliation ensures businesses comply with tax regulations, national insurance contributions, and other statutory obligations.

How to Reconcile Payroll (with Example)

Here’s a step-by-step breakdown of how to reconcile payroll:

Step 1: Gather Payroll data

Start by collecting all relevant payroll data for the period. This includes payroll registers, timesheets, tax filings, benefit deductions, and other documentation related to employee wages and benefits.

Example: You collect the following documents for the pay period:

• Payroll register showing a total payroll of £15,000
  
• Timesheets indicating the number of hours worked by each employee
  
• Tax filings showing tax withholdings of £4,500
  
• Benefit deductions, such as health insurance premiums, totalling £500
• Amount paid to the employee (net payroll) £10,000

Step 2: Compare reports to bank statements

Next, compare the payroll register to the bank statement. Ensure that the total payroll amount, including deductions and net payments, aligns with the total amount recorded on the bank statement for the period.

Example: Your bank statement shows a total payroll payment of £9,950 for the period. This should match the payroll register amount after deductions (net payroll). If your payroll records show £10,000 and the bank statement shows £9,950, the discrepancy of £50 must be investigated.

Step 3: Identify and investigate discrepancies

If any discrepancies are found between the payroll records and the bank statement, investigate the causes. Common discrepancies include missing transactions, incorrect deductions, or errors in tax calculations.

Example: Upon investigating, you discover that the £50 discrepancy is due to bank service charges for processing payroll payments. These charges were deducted directly by the bank but had not been recorded in the payroll register, causing the amounts to differ.”

Step 4: Adjust Entries

If discrepancies are identified, necessary adjustments should be made to the payroll register or financial records. This could involve correcting deductions, fixing overpayments or underpayments, or updating benefits records.

Example: You amend the payroll register to include the £50 bank service charge that was not initially recorded. After this adjustment, the net payroll is reduced to £9,950, aligning with the amount shown on the bank statement.

Step 5: Document and Report Results

Once all adjustments are made, document the reconciliation process, including a summary of any changes made. Prepare a report for management that outlines the reconciliation results and any corrective actions taken.

Example: You prepare a reconciliation report detailing the payroll reconciliation process. The report includes:

• Total payroll amount: £15,000
  
• Deductions (taxes and benefits): £5,000
  
• Net payroll: £10,000
  
• Bank charge: £50
  
• Corrected payroll register after adjusting for the bank fee: £9,950

Common Challenges in Payroll Reconciliation

While payroll reconciliation is essential, businesses often face several challenges:

• Manual processes and errors: Manual reconciliation is prone to human error, such as incorrect data entry or calculation mistakes, which can lead to discrepancies.
  
• Complex payroll structures: Businesses with many employees, different pay rates, or complex benefits structures may find payroll reconciliation more complex, increasing the likelihood of errors.
  
• Compliance with tax and labour laws: Staying compliant with ever-changing tax laws, deductions, and benefits regulations can be challenging for businesses, especially when the rules vary by location.
  
• Handling payroll across multiple locations: For businesses with multiple branches or locations, reconciling payroll can become more complicated, particularly when dealing with different tax jurisdictions or payroll schedules.

These challenges can make payroll reconciliation time-consuming and error-prone, but automation can help reduce these risks.

Aurum’s toolkit is a very versatile and flexible data handling solution, which allowed us to fully achieve payroll reconciliation objectives but could also be used much wider, most notably in Finance. It was quickly adopted by locations, which proves the user-friendliness of such technical software. The implementation support from Aurum’s team was great, they have a very positive approach, listening and responding to consumer needs with a “can do” attitude.

Alexander Cheremukhin, HR Programme and Governance Lead @ Imperial Brands

Conclusion

Payroll reconciliation is a crucial process for ensuring financial accuracy, preventing errors, and staying compliant with tax and labour laws. By following a structured reconciliation process, businesses can ensure that their payroll is accurate, that employees are paid correctly, and that risks are minimised. However, manual processes can lead to errors and inefficiencies. Implementing automated reconciliation software can simplify the process, reduce human error, and help businesses comply with regulatory requirements efficiently. Find out more with our guide about journal entry for payroll here.

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