Payroll reconciliation: Your how-to guide in 6 simple steps

Paying your employees is important, but so is payroll reconciliation. 1 in 4 small business owners say payroll is their most time-consuming financial task.

This payroll process helps with everything from preparing for taxes to monitoring your business expenses. It also ensures that you pay your employees correctly.

For example, reconciling your payroll helps ensure you don’t miss payroll deductions or taxes. The payroll reconciliation process is an important part of managing payroll. Let’s look at how reconciliation works and how to do it in six easy steps:

Jump to:

• How payroll reconciliation works
• 1. Check your payroll register
• 2. Confirm employee time cards
• 3. Check pay rates
• 4. Confirm paycheck deductions
• 5. Record in the general ledger
• 6. Submit payroll
• Next steps for streamlining your payroll process

How payroll reconciliation works

Payroll reconciliation compares your payroll register with the amount of money you’re paying your employees to ensure they match. You're essentially double-checking your math to ensure you pay your employees correctly.

Payroll reconciliation should happen frequently

You should reconcile payroll at least two days before each payday to catch and correct any discrepancies before issuing paychecks. You’ll also want to reconcile quarterly when submitting Form 941 and annually before issuing Form W-2s to ensure all records are accurate.

• Every pay period before you cut employee checks—ideally, at least two days before your payday. 
• Quarterly when you submit Form 941 with your quarterly federal tax return. 
• Annually before tax due dates when you confirm that your payroll data matches each employee’s Form W-2. 

Why is payroll reconciliation important?

Payroll reconciliation is essential for several key reasons, such as avoiding fines and penalties. Making mistakes with payroll not only destroys morale but can also lead to penalties from the IRS. You also want to keep accurate payroll records to avoid major headaches and hassles come tax time—plus the potential for more penalties.

What to look for during reconciliations

During quarterly reconciliation, compare the total wages and taxes in your payroll register to what’s reported on Form 941. Look for mismatches in income tax, Social Security, or Medicare amounts. Any inconsistencies could signal a reporting or withholding error.

You’ll need a few things before you start your payroll reconciliation process. Make sure you have the following within reach:

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

With these items, you can get into the specific payroll reconciliation steps:

1. Check your payroll register

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

• Name
• Birthdate
• Social Security number
• Employee number

In addition to those basic details, your payroll register should also record all of the payroll activity from each pay period. This will include tracking things like:

• Hours worked
• Pay rate
• Pay date
• Regular hours
• Overtime hours
• Federal, local, and state income taxes
• Employee withholding for FICA taxes
• Other payroll deductions
• 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 an employee recently change their payroll withholding status or number of allowances? You'll need to update that in your payroll register. Did you bring on a new employee? Remember to list that on your payroll register, too.

2. Confirm employee time cards

When reconciling payroll for a specific pay period, you’ll need to look at your employee’s time cards or timesheets for that period. Check to see if their hours are correct and confirm the hours on their timesheet match your payroll register.

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

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

All of those will impact the amount of your employee’s paycheck for that pay period. Note that this step is far less time-consuming if you use time-tracking software instead of paper timesheets and time cards.

3. Check pay rates

After figuring out how many hours you need to compensate an employee, it’s time to determine the other half of the equation—the pay rate you should multiply that number by. Look at the pay rates on your payroll register. Are those numbers still current?

For example, an employee recently got a raise. You’ll need to update their pay rate on your payroll register. Or, perhaps you have a new overtime rate. You will also need to reflect that on the register.

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.

4. Confirm paycheck deductions

Now, you need to ensure that you’re withholding the correct amount from their paychecks. At a minimum, you’ll need to withhold the following from your employee’s paycheck:

• Social Security
• Medicare
• Federal income tax
• State income tax (if applicable)

However, you could have other deductions from their paycheck. These might include:

• Local taxes
• Retirement plans
• Health insurance
• Wage garnishments

Again, all of this should be up-to-date in your payroll register. But, if you have doubts about the accuracy of that information, check your employee’s Form W-4 to confirm their withholding amounts with your payroll reconciliation report.

Deductions should be reported individually rather than as a lump sum. That helps you double-check and is also important when you need to file your small business taxes.

5. Record in the general ledger

Whenever you run payroll, you must also record it in your business’s general ledger. These are payroll journal entries or ledger entries. Record each financial transaction in your general ledger and split transactions into the following categories:

• Assets
• 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 more straightforward and streamlined with accounting software or payroll services. That will eliminate a lot of manual effort and reduce human error.

6. Submit payroll

You have all your double-checking and recordkeeping in place. Now you’re ready to print your employees’ paychecks or make their direct deposits on payday. You’ll also need to deposit the federal income tax you withheld, as well as the employer and employee share of Social Security and Medicare taxes (known as FICA taxes) to the IRS.

Plan to submit these payroll taxes either on a monthly or semi-weekly schedule.

At year-end, reconciliation is especially important. Match your payroll register totals for the year with your four Form 941 filings. Then, confirm that this data matches each employee’s W-2 to avoid errors that could delay tax filing or lead to penalties.

Next steps for streamlining your payroll process

Ultimately, payroll reconciliation isn’t nearly as big of a burden as what happens if you don’t reconcile payroll. To help automate the payroll process and ensure you pay your employees correctly, consider using payroll software to save time and help reduce human error.

*QuickBooks Online Payroll & Contractor Payments: Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services, subject to eligibility criteria, credit, and application approval. For more information about Intuit Payments Inc.’s money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/*