Payroll Reconciliation

1 Payroll Reconciliation for Businesses with Outsourced Payroll - by Joseph G. Pugh, CPP Of all outsourced services, payroll can be one of the most economical. Large payroll companies (hereafter referred to as PCs) have become experts at efficiently processing payroll en masse and charging a very affordable fee for doing so. In fact, of all accounting-related functions, payroll processing is arguably the most frequently outsourced. One major advantage of this is that outsourcing payroll can be an economic method of minimizing the risk of compliance gaps in the payment of payroll taxes. On the other hand, this practice can have its pitfalls if the client company assumes that the purpose of outsourcing payroll is to save staff time. It isn't. The complexity of payroll processing requires that client staff pay meticulous and ongoing attention to the management of payroll data from the point of compiling pay information through complete reconciliation between the payroll worksheets, the payroll company's reports, and the client's general ledger. One of the primary weaknesses of outsourcing payroll is the “communication gap” between the client and the payroll company. This can be seen whenever the payroll package contains unintentional deviations from the client's intent. This unfortunate circumstance usually results in the client's complaint that “payroll wasn't done right,” and the payroll company's rehearsed response that “you didn't properly inform us of what you wanted.” Necessary corrections of such problems is time consuming and can be embarrassing to the client if the problem is identified by the employee whose paycheck is affected! Only a careful per-pay period review of all facets of the payroll reports will reveal any deviations from the client's intent. A starting point for such review lies in the properly organized documentation of the client data in a format that can be readily compared against the payroll company's report to identify problems. The purpose of this paper is to suggest one method for making this process practicable and efficient for in-house staff. The efficient payroll process begins with a well designed worksheet. This writer recommends using a multi-page Excel or other spreadsheet document. The first page of the spreadsheet can ideally be used to contain raw per-payroll data. The second page can be used as a printable reconciliation form which would draw some totals from the preceding page, and have other fields available for direct input from the payroll company's reports. The final page can be used to record changes and adjustments made to employees' payroll as needed. The purpose of the first page of the worksheet is to provide a vehicle for the initial entry of hours and earning data. This will allow for the efficient transmission of data, whether via download or via telephone call, to the PC. In addition, this page will serve as a valuable source of totals for the reconciliation process. Useful columns to have on page 1 include: PC file number (that code which designates individual employees to the PC), department code (if applicable), rate of pay (or other designation), employee last name, first name, comments (useful to refer to during a payroll call-in), separate columns for each type of “hours” designation needed (e.g., regular, OT, vacation, sick, personal...), total hours worked, Gross pay (this may be a calculated field normally based on the data in the rates and “total hours” columns). It may also be useful to

include columns pertaining to employer contributions such as FICA and unemployment. To the degree that these can be calculated or at least estimated, it will be valuable to the company’s cash management function to estimate the overall cash requirement as early as possible. This exercise can also help identify any variances between the payroll department’s calculation and that of the PC. The second page of the worksheet ought to contain, in a close readable space, cells that read subtotals from page 1 for quick comparison with the PC numbers. At the end of a payroll call, the PC should provide such figures as the total hours entered and gross pay. By switching to page 2, the payroll manager should be able to see at a glance all such totals and point out any deviations. Page 2 should also contain cells labeled for the PC report totals, including gross pay, net pay total, tax deposit total, and other figures such as department totals or tax deposit breakdown figures. As soon as the PC reports are available, these figures should be checked against those from the worksheet to identify any anomalies before giving the paychecks/advise to employees. The one scenario that should be most avidly avoided by the Payroll Manager is to have an employee catch an error in their payroll that the payroll Manager isn’t already on top of! Often the payroll figures are posted into the general ledger directly from the PC report. Once this process is completed, it is recommended that a GL detail report sorted by account be printed including all and only those GL accounts hit via the payroll process. The totals of each account should be entered in fields on page 2 of the PR worksheet, completing the full measure of reconciliation needed for the full payroll process. It would also be very useful for audit and review purposes to print page 2 as the cover sheet of a paper reconciliation including copies of key pages of the PR report and the GL printout mentioned above. The final page of the PR worksheet should be used as a log to record adjustments to hours, earning and leave accruals for future reference. The only columns needed here are those for date, file number, Last name, First name and a description of the change made. In Excel, this sheet can be filtered by employee to view and print only those changes made on behalf of a particular employee. This printout can be obviously useful to help resolve disputes with an employee or for inclusion in an employee file after termination. In conclusion, the process of payroll activity is so sensitive, and often comprises such a large percentage of a company’s accounting volume, that special attention to accuracy and documentation is required. The steps outlined above, if consistently followed, can produce a very workable system of documentation and accuracy check for the small to medium size company. This author is currently employed with a Philadelphia management consulting firm and can be reached at [email protected]