Reconciliation Definition
Reconciliation, in simpler words, is the act of checking the salary documents and comparing them with the salary paid to the staff. It is mostly done by the payroll department of startups and SMEs.
Paying employees correctly and timely is one of the most important duties of any business. However, it is easier said than done– especially if you are a medium-sized business or a startup.
Let’s dive in and understand everything about payroll reconciliation you must be aware of.
Here, we will discover:
What is Payroll Reconciliation?
The Payroll Reconciliation process is where you are ensuring the current payroll amount tallies with the corresponding figures in the payroll ledger. This is the final stage towards validating your processed amounts. All the financial components such as gross pay, taxes, withholdings and net pay are recorded in the ledger. You must verify and match these figures to the payroll calculations that you have performed.
Why is Payroll Reconciliation Important?
The way you or your team handles your payroll can significantly communicate your company’s degree of financial control. If your company has a poorly managed payroll system acting as an indicator of inadequate financial tracking, damaging conclusions will occur to individuals like employees, potential employees, customers, vendors, investors, and banks, impacting your reputation.
It is also important to note that implementing a reliable, regular pay schedule reduces the risk that employee morale will be negatively affected due to late payment.
Payroll reconciliation greatly benefits your organization in the face of an audit. By using this tool, you will consistently have precise records of all your payroll transactions readily available, greatly simplifying your process of meeting regulations and filing taxes.
How is Payroll Reconciliation Done?
Here is a step-by-step process to ensure an effective payroll reconciliation:
Cross Check Payroll Register:
Organizations are assisted by the payroll register in keeping a more precise record of every payroll transaction.
It often comprises details comparable to employee work hours, payment schedule, overall net pay, overall gross pay, and the entire deductions i.e., taxes for each payment cycle.
So, complete verification is a must to make certain that all of the written information is up-to-date and accurate.
Re-verify this data in the future also, as the wages increase for your employees, or if a new employee is added to your company.
Verify the Work Hours of Employees:
Your payroll expenses are mostly attributed to the hours your staff worked. Double-check against the attendance that is saved in the time sheets of your employees.
Consider such things as vacation pay, sick pay, overtime and other features that are useful, too. If you’re utilizing a time management system that is working with cloud engineering, it will be infinitely easier to obtain your attendance info.
Otherwise, add it yourself from whatever info you discover in the timesheets or have from them.
Verify Payroll:
After several salary increases in the previous period, it would be good to check over employee compensation thoroughly.
Utilize the appropriate hourly pay rates as needed by your firm to ensure all gross pay for employees runs correctly.
Your salaried employees have a fixed gross compensation each month no matter how many hours they work. Be certain that these figures match up before you move on to deductions.
Income Deductions & Tax Obligations:
Deductions and withholding often change as the turn of the year sees benefit renewals and new tax laws. Work closely with financial teams to stay alert to potential changes at the local and national levels. You will need to verify federal and state taxes, social security, insurance, and more, depending on the country and location where you are doing business.
Document the Data in Your Ledger:
The general ledger encompasses a thorough record with a comprehensive listing of all of the firm’s spending, revenue, liabilities, and assets, inclusive of every financial transaction that the business conducts. The aggregate remuneration that was paid out to employees is recorded in the debit column, while the total sum of income tax, and other withholdings is recorded in the credit column of the ledger at this stage.
There you go!
Payroll reconciliation is an extra step in the payroll process but worth the time, given the need for an accurate system that keeps your employees happy and your company compliant.