Although not the most exciting aspect of the job, there’s no denying that reconciliation is critical to the payroll process. Whether you’re doing payroll reconciliation for the first time or the hundredth time, we put this checklist together to ensure your employees get paid correctly, every time.
Imagine accidentally adding a work-from-home allowance as an earning when it should’ve been a taxable benefit. How do you handle that? Do you ask them to refund the overpayment or apply it to their next paycheque?
Regardless of what you do, you still have a big mess to clean up. Common payroll errors like this just go to show why having a regular payroll reconciliation process is so important. Making time for reconciliation is a best practice and should be part of managing payroll and ensuring compliance.
What is payroll reconciliation?
Payroll reconciliation is the process of verifying that employees are being paid correctly and, in the process, ensuring any last-minute changes are accounted for. The process itself involves comparing your payroll register with what you plan to pay your employees, and ensuring they match.
Remember when your teachers would ask you to double-check your work before turning in a test? This is essentially the same thing. You’re double-checking your math to ensure that your employees will be paid correctly.
Why is payroll reconciliation important?
It may be your least favourite part of payroll, but it’s easily one of the most important. If you aren’t regularly reconciling your payroll, things can easily fall through the cracks and open your organization up to risk.
Accurately paying employees
First and foremost, reconciliation ensures your employees are paid accurately. If you’re over or underpaying your employees, it could damage trust. Your employees rely on you to receive the correct amount on their paycheque, and if they experience frequent issues with their pay they aren’t likely to stick around.
Repeated payroll errors could lead to turnover within your organization, which means more time and money spent on hiring and onboarding. According to a 2022 survey from The Harris Poll and Express Employment Professionals, employee turnover costs companies an average of over $41,000 each year, including the cost to rehire, lost productivity, and more.
Protecting your cash flow
People are often an organization’s largest expense, making up around 68% of a company’s total overhead. This is just another reason why you want to make sure your payroll numbers add up. If they don’t, it can have a material impact on your business.
If your compensation isn’t reported correctly, it can overstate or understate the amount of cash on hand to pay bills. Your executive team could be making critical business decisions based on inaccurate data, like cutting budgets, reducing headcount, or selling office space. All of this has a ripple effect on the rest of the business, from productivity to morale.
Maintaining compliance
Reconciliation is also a crucial compliance tool. Payroll errors mean your general ledger could have incorrect information, which can create a lot of stress when it’s time to remit payroll deductions with the Canada Revenue Agency (CRA) or Revenu Québec. In addition to the hassle of reversing incorrect entries, errors could also lead to costly fines and penalties for your organization.
Here are just a couple of the payroll penalties outlined by the CRA:
- Assess a penalty of 10% of the amount of the Canada Pension Plan (CPP), employment insurance (EI), and income tax you did not deduct
- Assess a penalty of 3-10% on late or non-payment for remittances over $500
Preparing for a smooth year-end
Payroll errors that could otherwise be fixed during month-end can quickly snowball if they aren’t addressed. A little bit of legwork upfront can save you time and frustration later, trust us.
Take year-end for example. If and when you find errors during year-end, you have a very short window to correct them. The odd one-off payroll error is one thing, but when those add up, year-end becomes unnecessarily stressful.
How often should you do payroll reconciliation?
We know that all payroll professionals reconcile their payroll at least once a year during year-end, but if this is the only time you’re looking at your deductions and general ledger accounts, we’ve got some news for you.
At the very least, you should be doing a quick payroll reconciliation every pay period. That said, we know there are always exceptions to the rule. Some tasks will have a different frequency than others.
For example, setting up new earnings and benefits and whether they are insurable, pensionable, or taxable. You may not have new earnings or benefits every pay period. In that case, you should check in on this monthly or quarterly (whichever makes the most sense for your organization) to ensure they’re set up correctly.
Your payroll reconciliation checklist
When you think about all the checks and balances involved in reconciling your payroll, it can seem overwhelming at first. But like any process, it can be broken down into small steps that are easy to follow.
You should have your payroll register, employee time sheets, and general ledger within reach to complete these steps.
Step #1: Check your payroll register
The first step in the reconciliation process is to ensure that all your payroll register information is correct. Your payroll register contains all the details about an employee’s payroll during a pay period.
You should have basic personal information like their name, location, pay group, and employee number.
On top of the basics, you should also have a table of data for the pay period that lists your employee's hours worked (regular and overtime), pay rate, salary, deductions, benefits, gross pay, net pay, and pay period date.
Some common things to look out for:
- Did you hire a new employee? Make sure they're on the payroll register.
- Did you create a new pay group? Make sure that’s recorded in the payroll register.
Step #2: Approve timesheets
Next, when reconciling payroll for a specific pay period, you’ll need to review and approve employee timesheets. Timesheets match scheduled time against worked time. Depending on the size of your organization, you may be responsible for that or may have managers who approve time.
Whoever is approving timesheets should carefully review time off (paid, unpaid, vacation time, sick days), overtime, and holidays. This process is much less time-consuming if you’re using payroll software integrated with a time and attendance solution as opposed to paper or Excel timesheets.
Step #3: Double-check your pay rates
After you’ve reviewed the time worked, the next step is to look at pay rates. Pay rates refer to the amount employees are paid over a period of time. They apply to both hourly employees and salaried employees.
Some common things to look out for:
- Are there any shift premiums that apply? Make sure that this is accounted for in the payroll register.
- Did an employee get a raise? Make sure any pay rate changes are reflected in the payroll register.
- Did you change your overtime rate? Make sure that this is updated in the payroll register.
This is a critical step because it’s how you’ll determine your employee’s gross wages. If this is not correct, it’ll throw off everything in the next step when you look at deductions.
Step #4: Double-check your payroll deductions
Sometimes referred to as vendor remittance, this is the process of checking that income taxes and other required deductions have been correctly withheld from an employee’s paycheque.
At a minimum, you should be withholding the following:
There are also additional deductions you can make depending on your organization, including health benefits, RRSPs, and others. They should all be recorded individually, not treated as a lump sum. Employees should be able to see how much is being deducted for each on their pay statement.
Checking these with each pay run instead of waiting until the end of the month, quarter, or year can make sure your year-end goes smoothly.
Step #5: Submit your payroll
Now that you’ve double (maybe even triple) checked your payroll data, it’s time to run your payroll. Whether you print your paycheques or pay employees via direct deposit, you should feel confident that their pay is correct and that all the information on their pay statement is accurate.
In Avanti, finalizing your pay run is easy with our required processes checklist. Before you hit OK, you’ll see a list of critical steps in the process like checking the payroll register and G/L distribution to make sure nothing gets missed.
Step #6: Record in the general ledger
Whenever you run payroll, it should be recorded in your organization’s general ledger as a payroll journal entry or ledger entry. Your general ledger is a ‘book’ of every financial transaction. These transactions are organized into the following categories:
- Assets
- Liabilities
- Capital
- Revenue
- Expenses
Employee wages are treated as a debit and deductions on those wages are credits. Using payroll software can significantly simplify this process and make it easy to reconcile your payroll. For Avanti clients, you can reconcile your general ledger entry with Avanti’s Payroll Summary report.
Payroll with confidence
At the end of the day, payroll reconciliation is simpler than dealing with the consequences of easily avoidable payroll errors. Having a trusty reconciliation checklist means you’ll spot these mistakes and address them quickly—no mess, no stress.
Reconciliation is also your first step to managing payroll compliance. As a payroll manager, compliance is a core part of your responsibilities. Being compliant ensures your organization fulfills its responsibilities when paying employees. As an added bonus, it also means you are a trusted partner within the business. Your executive team can lean on you to provide accurate, reliable data and, most importantly, you can pay your employees accurately and on time, every time.
