A business can only be successful if it’s employees feel they are appreciated. So ensuring they are getting compensated correctly is not only in their best interest, but is also in the best interest of a small business owner.

One of the top reasons that an employee will leave a company is due to incorrect wages. No employee wants to work hard only to see they didn’t get the bonuses they were promised, or that they didn’t receive the correct overtime pay. And they especially don’t want to put extra work in to track down their employer and dispute their paycheque. Payroll reconciliation will not only ensure you won’t be in trouble with the CRA, but it will also guarantee you are retaining your top employees.

What is Payroll Reconciliation?

Payroll reconciliation is the process of ensuring that all calculations relating to payroll have been completed and recorded accurately. This is done by comparing the current period’s payroll total, with the figures in the payroll ledger to make sure that both records match. Information such as gross pay, taxes, withholdings, and net pay are recorded in the ledger and need to be compared to the originally calculated payroll numbers to verify that all the results are accurate.

Part of your payroll obligations are to make sure your records and accounts reflect the employee’s actual pay plus all of the deductions from their paycheques.

For example if an employee earned $2,600 during a payroll period, but only received $2,000, the $600 difference would go to taxes, insurance deductions, healthcare benefits etc. Reconciling the payroll would involve verifying that all the accounts affected by the payroll transactions add up to the total gross amounts used in calculating the cheque.

Why is Payroll Reconciliation Important?

Payroll reconciliation ensures you’re running a precise payroll and helps you maintain accurate records for financial reports and compliance purposes. This will be beneficial when it’s time to generate quarterly and year-end reports, because if you only realize that your numbers don’t add up at the end of the year, you will be caught in a needle in a haystack situation trying to track down old documents.

Another benefit that comes from payroll reconciliation is employee retention. If the people who work for you are constantly seeing mistakes in their cheques, they could start feeling undervalued. Reconciling payroll will ensure your payroll is error free and will keep your employees motivated to do their best work.

3 Considerations When Reconciling Payroll

Here are 3 important aspects of the payroll reconciliation process to consider:

1. Verifying transactions

Payroll reconciliation includes making entries to distribute payroll to the appropriate cost accounts – including validating that transactions occurred correctly. For example, let’s look at the salaries of people who work in manufacturing. Their salaries will have a direct impact on the account “costs of goods sold” (costs of goods sold is the account that reflects how much the business owner needs to pay in order to produce his goods). The accountant needs to verify that the amount placed into the “costs of goods sold” account matches with payroll posting.

2. Reconciling against budget

An important aspect of reconciling payroll is comparing it to the budget for the period. The accountant or clerk uses the actual figures and compares them to the budgeted figures for the period. A report may be generated to provide to a department manager that shows areas where salaries are over or under budget.

3. Earning and payroll registers

Other reconciled areas include verifying the accurateness of earnings – including checking over-time, hourly salary or wages and payroll registers. When you add together the tax accounts, the various withholding accounts and all accounts associated with payroll together, the transactions for the period must equal the payroll.

5 Steps to Reconciling Payroll

In order to avoid some of the most common payroll mistakes, follow these five steps to reinforce your payroll reconciliation process. In addition to these 5 steps, you can also download and follow our payroll reconciliation checklist to keep track of all the possible checkpoints you need to complete.

Download a free payroll reconciliation checklist here.

1. Evaluate payroll records

First things first, all employees’ data needs to be entered correctly in the payroll register. This data includes:

• Name
• Birthdate
• Social Insurance Number
• Employee number
• Hours worked
• Pay rate
• Pay date
• Regular hours
• Overtime hours
• Employee withholding for the CRA
• Other deductions (such as health insurance, retirement plans, wage garnishments, etc.)
• Gross pay
• Net pay

The information in the payroll register can be compared to the payroll ledger to ensure all the calculations were completed correctly.

If you notice a change in your overall payroll costs, check to see if there have been any updates to the payroll, such as the addition of a new employee or the elimination of an employee. Bonuses and commissions will also cause the regular payroll totals to be off. Scan for personnel modifications first before assuming anything has been entered incorrectly.

2. Review salaries and pay rates

If an employee’s salary information has changed (like getting a raise) this must be adjusted in the payroll register. Focus especially on new hires or employees who have received a promotion or a bonus to ensure that the information has been entered correctly.

The quickest way to do this is to keep new employee records and compensation adjustments apart from the rest of the payroll before accessing payroll details. This way, you can double-check that the modifications and improvements were entered right. It should be fine if an employee’s pay does not change.

3. Check timecards for hours worked

Keep completed and accepted time cards to make sure that all hours are entered correctly. The following will also need to be accounted for:

• Paid time off
• Unpaid time off
• Vacation time
• Sick days
• Overtime
• Holidays

4. Deductions

By law, an employer must deduct the following amounts from your employment earnings (other deductions may apply):

• Income tax
• Employee contributions to Employment Insurance (EI)
• Employee contributions to the Canada Pension Plan (CPP)

Ensure that you calculate each deduction individually and pay extra care to employees’ information that has recently been changed.

For example, if your receptionist becomes eligible for new retirement benefits this pay cycle, you must include the additional deduction. Similarly, if one of the staff updates their withholding information, double-check that the updated withholding information is entered.

5. Journal entries

In order to accurately reconcile costs, you will need to frequently schedule and log a payroll journal statement. Create journal entries in your general ledger or payroll journal according to the data on the payroll register. Record a payroll journal entry that shows the sum of your employees salary/wages as a debit, then list the total for each type of wage deduction and a credit.

Keeping track of journal entries will ensure you know exactly where your money is funnelling.

This and most other steps will be done for you if your payroll software integrates with your accounting software.

QuickBooks Online can help you with your payroll reconciliation by automating a lot of the payroll process and therefore reducing the chance of human error. It will also save you time by performing all the necessary calculations for you and keep your business running efficiently. Try it today.