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Payroll

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

By QuickBooks Australia

Published on June 4, 2024

You know that paying your employees is important. So is payroll reconciliation.

This payroll process might sound onerous, but it helps with everything from preparing for taxes to monitoring your business expenses – not to mention ensuring that you pay your employees correctly.

For example, imagine that your employee’s pay was supposed to be $800, but you made a mistake and paid them $950 instead. What do you do? Do you ask them to refund the overpayment? Do you apply it to their next check?

Or maybe you messed things up in the opposite direction. Your employee was entitled to $800 in pay, but you only gave them $750. Even though it wasn’t intentional, now you’ve underpaid them and could be subject to penalties.

Either way, you have a big mess on your hands and it’s proof that the payroll reconciliation process is an important part of managing payroll.

Use the links below to jump to the section that best covers your query, or read from start to finish for an in-depth overview on the topic.

What is payroll reconciliation?
How to reconcile payroll
Payroll reconciliation process
Payroll reconciliation

What is payroll reconciliation?

Payroll reconciliation is when you compare your payroll register with the amount you’re planning to pay out to your employees to confirm that those numbers match. The simplest way to think about it is double-checking your math to ensure that you pay your employees correctly.

Payroll reconciliation should happen frequently. You’ll need to do it every pay period before you pay employees via Single Touch Payroll (STP). Then you’ll need to make an end-of-year finalisation declaration through STP each year by 14 July.

While payroll reconciliation might not be your favourite small business task, it’s important to do on a regular basis so that you can:

Pay employees correctly. A whopping 49% of workers say they would start a search for a new job after experiencing only one or two problems with their pay.
Avoid fines and penalties. Making mistakes with payroll not only destroys morale, it can also lead to an investigation by the Fair Work Ombudsman and penalties.
Keep accurate records. Failing to reconcile payroll means your books and general ledger can be outdated and incorrect. This causes major headaches and hassles come tax time – plus the potential for more penalties.

Keep in mind that a payroll expense is one of the biggest costs that small business owners need to cover, making up 68% of the average company’s overhead. Needless to say, you want those numbers to be correct.

How to reconcile payroll: A brief overview

You’re sold on the importance of the payroll reconciliation process. But, knowing how to do it is an entirely separate challenge. Let’s start with a high-level overview before we dig into the specifics.

Payroll reconciliation involves looking at your payroll register, confirming that information is correct, and then ensuring that it matches what you’re going to print on your employees’ pay slips or deposit into their accounts.

To tackle this, you’ll want to make sure you have the following within reach:

Your payroll register, to get all of the payroll data you need.
Employee time cards or timesheets, to get hours worked for that specific payroll period.
Your general ledger, to record wages and deductions and maintain accurate financial records.

Have those ready to go? Now we can get into the specific payroll reconciliation steps.

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Payroll reconciliation process in 6 steps

Payroll reconciliation sounds daunting, and it’s yet another thing on your plate as a small business owner. Research from SCORE found that 54% of business owners spend over three hours on payroll every month; with 28% spending over six hours per month.

Fortunately, you can make this process a little more manageable by breaking it down into these six steps.

Step 1: Check your payroll register

Your payroll register lists all of the details about an employee’s payroll during a pay period. It should include basic information about the employee, including:

Name
Birthdate
Tax file number

Your payroll register should also record all of the payroll activity from each pay period, including:

Hours worked
Pay rate
Pay date
Regular hours
Overtime hours
Income tax
PAYG withholding
Other deductions (such as voluntary super, wage garnishments, etc.)
Gross pay
Net pay

You’ll need to start the payroll reconciliation process by ensuring that all of this information is correct.

For example, did you bring on a new employee? They need to be listed on your payroll register too.

Additionally, you should double-check your math by confirming that an employee’s gross pay on your payroll register is equal to their pay rate multiplied by the total number of hours worked.

Step 2: Confirm employees’ timesheets

When you’re reconciling payroll for a specific pay period, you’ll need to look at your employees’ timesheets for that span of time. Check to see if their hours are entered correctly and confirm that the hours on their timesheet match what’s in your payroll register.

Keep in mind that you’ll also need to account for:

Paid leave
Unpaid leave
Holiday pay
Sick pay
Overtime
Public holidays

All of the above will impact your employees’ pay for that pay period. Note that this step is far less tedious and time-consuming if you use payroll software like QuickBooks, as opposed to paper timesheets.

Step 3: Check pay rates

Now you know how many hours you need to be compensating an employee for during that payroll period. It’s time to determine the other half of the equation by figuring out what pay rate you should be multiplying that number by.

Turn your attention to only the pay rates printed on your payroll register. Are those numbers still current?

For example, maybe an employee recently received a raise. Their pay rate needs to be updated on your payroll register. Or, perhaps you changed your overtime rate. That should be reflected in your register too.

This step is crucial, as you’ll use these pay rates to determine your employee’s gross wages. If this isn’t correct, your entire payroll will be off.

Step 4: Confirm pay deductions

You know that you can’t just multiply the hours worked in that pay period by the employee’s pay rate and pay that amount. You need to ensure that you’re withholding the correct amount from their pay, which is what happens in this step.

At a minimum, you’ll need to withhold PAYG contributions from your employee’s payroll payment. However, you could have a number of other deductions from their payroll payment, including but certainly not limited to:

Voluntary super contributions
Wage garnishments for child support or another debt
Professional dues and association fees

Again, all of this should be recorded and up-to-date in your payroll register. But, if you have your doubts about the accuracy of that information, check the Australian Taxation Office (ATO)’s tax withheld calculator to confirm their withholding amounts.

Every single deduction should be reported individually, rather than as a lump sum. That not only helps you double-check, but it’s also important when you need to file your business taxes.

Step 5: Record payroll in your general ledger

Whenever you run payroll, you also need to record it in your business’ general ledger. These are called payroll journal entries or ledger entries.

You might hear your general ledger referred to as your business’ “books”, as it’s where you’ll keep records of all of your financial data. Every single financial transaction gets recorded in your general ledger, and transactions are split into the following categories:

Assets
Liabilities (both employee liabilities and employer liabilities)
Owners’ equity
Revenues
Expenses

You’ll record total wages paid to your employees as a debit, and record deductions as a credit. This is another process that’s a lot more straightforward and streamlined if you use accounting software or payroll services. That will eliminate a lot of the manual effort and reduce human error.

Step 6: Submit payroll

You’ve completed all of the necessary double-checking and recordkeeping. Now you’re ready to print your employees’ pay slips or transfer their pay on pay day.

Keep in mind that you’ll also need to deposit the income tax you withheld as well as the employer super contribution through the PAYG system.

Avoid headaches and hassles with payroll reconciliation

Ultimately, payroll reconciliation isn’t nearly as big of a burden as what happens if you don’t reconcile your payroll.

The good news is that the process doesn’t need to be cumbersome, especially if you use a payroll software like QuickBooks. That can automate a lot of the process while simultaneously reducing human error.

While we understand that the last thing you need as a business owner is yet another thing to do, payroll reconciliation is non-negotiable. It helps you maintain adequate records, avoid pesky fines and penalties, and most importantly, pay your employees correctly.

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

What is payroll reconciliation?

How to reconcile payroll: A brief overview

Grow Your Business with QuickBooks

Payroll reconciliation process in 6 steps

Step 1: Check your payroll register

Step 2: Confirm employees’ timesheets

Step 3: Check pay rates

Step 4: Confirm pay deductions

Step 5: Record payroll in your general ledger

Step 6: Submit payroll

Avoid headaches and hassles with payroll reconciliation

Related Articles

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