Payroll reconciliation: what it is and how it works

Payroll reconciliation is an important part of payroll management because it helps ensure the accuracy of salary payments and also lowers the risk of fines and penalties for inaccurate or incomplete payroll records. It is a crucial process that should be carried out for each pay period and also at the end of each quarter and as part of year-end payroll processing. 

But what does reconciling payroll actually mean? Why is payroll reconciliation important? And what does the process look like?

Reconciliation is an accounting process during which different financial accounts, numbers, or records are compared to check that they are correct and in agreement with one another. The overall aim of reconciling financial records is to detect potential discrepancies or errors.

In payroll, reconciliation refers to the process of ensuring that all the information, transactions, and records related to employee compensation, salary payments, and payroll taxes are complete and accurate and that they add up to the same total.

Payroll reconciliation is a process that should happen on a regular basis—and not just once in a while. Ideally, payroll should be reconciled during each payroll run before employee paychecks are issued. This ensures that wages and salaries are accurate.

Additionally, a payroll reconciliation audit should be performed once every quarter and as part of your year-end payroll checklist. Quarterly and annual reconciliation processes for payroll should be more in-depth and put a stronger focus on general payroll compliance and accounting accuracy.

Payroll is linked to several different data sources, accounts, and records, all of which need to be considered during payroll reconciliation. Reconciling payroll can involve different processes, depending on when the reconciliation is carried out and what the purpose is.

The normal payroll reconciliation process is carried out for each pay period before the actual payments are issued to employees. It involves reconciling gross and net pay amounts with pay rates, hours worked, employee information, and payroll deductions.

Payroll reconciliation might not be the most fun task when it comes to managing and processing payroll, but it is an important business process that should be carried out at regular intervals. Reasons why reconciling their payroll is important for businesses include:

• Payroll compliance: Payroll reconciliation helps detect discrepancies in employee compensation, payroll taxes, payroll records, and more. This, in turn, enhances the business’s overall payroll compliance.

• Payroll accuracy: Reconciling payroll ensures that employees are paid accurately and on time. Since payroll accuracy is an important contributor to employee retention, the value for businesses is twofold.

• Payroll fraud: Comparing financial statements and accounts related to payroll is an efficient means for preventing payroll fraud. Critically checking all outgoing payroll transactions can help businesses detect overpayments or payments to employees who are still on the payroll although they don’t work for the company anymore.

• Payroll data consistency: Inconsistent payroll data can quickly become a major problem for businesses. Ensuring consistency between data, financial transactions, and bank accounts can help prevent several problems in the long run and provides the basis for accurate payroll reporting.

• Accuracy of financial statements: Payroll is a major cost center for businesses, which is why the accuracy of the payroll directly influences the accuracy of a business’s accounting. Payroll reconciliation is therefore an important measure for enhancing the accuracy of financial statements, transactions, and more.

Payroll reconciliation should be performed at regular intervals, ideally as part of an in-depth payroll audit during which all the business’s payroll data, processes, records, and policies are checked for accuracy, completeness, and compliance.

Download the ultimate payroll audit checklist.

Get PDF

Payroll reconciliation involves several steps and processes during which different numbers and accounts are cross-referenced. Here is an overview of the main steps of the payroll reconciliation process that should happen for each pay period:

• Reviewing payroll register data: The payroll register is the central database where all the information about each employee’s pay is recorded for each pay period and pay day. Ensuring that all the information listed in the payroll register is correct is the first step when reconciling payroll.

• Double-checking employee timesheets: The payroll reconciliation process for a specific pay period should include an additional check of employee timesheets to ensure that the recorded hours match with what’s recorded in the payroll register.

• Checking pay rates: The next step is to go over the pay rates that are recorded in your payroll register to make sure that they are accurate and up to date.

• Verifying deductions: Calculating payroll deductions is an important part of processing payroll because it allows businesses to determine each employee’s take-home pay. Verifying that all the necessary deductions have been made is yet another step in the payroll reconciliation process.

• Recording all the data: In a final step, all the information regarding employee pay must be recorded in the business’s general ledger by creating a payroll journal entry. 

Manual reconciliation processes are very time-consuming and leave room for payroll errors that can become very costly for businesses. Especially when reconciling payroll data and processes for a large number of employees, it often pays off to use payroll software. 

Payroll reconciliation software allows businesses to eliminate manual cross-referencing when comparing payroll data, payments, and account statements, which frees up time that can then be spent on other tasks that bring more value to the organization.

Payroll reconciliation is always a time-consuming process that encompasses various different steps and requires attention to detail. When reconciling a global payroll, however, the process becomes a lot more complex.

Global payroll reconciliation is the process of checking the accuracy and completeness of multi-country payroll data and comparing the data against international payroll transactions and bank account statements. This includes comparing payroll data from in-country providers with the source data used for payroll calculations to detect variances and enable global payroll managers to investigate the detected discrepancies immediately.

Similar to general payroll reconciliation, the aim is to detect and rectify any discrepancies and verify that all payments made to employees are properly recorded and align with payroll calculation results. At the same time, all international payroll processes, deductions, and reports are assessed for compliance with legal regulations.