Use Payroll Reconciliation for Small Business to Record Your Books Accurately

As a small business owner, payroll is one of your biggest expenses. You need to make sure you run payroll and record it in your books correctly every time. Check your general ledger entries with payroll reconciliation for accurate accounting and payroll records.

Payroll entries in the general ledger

Payroll transactions involve different accounts in your books, including expense and liability accounts. Every time you run payroll, you must record it in the general ledger.

Usually, you record the following kinds of payroll transactions in the ledger:

• Salary and wage expenses
• Employer liabilities
• Employee liabilities (withholdings and deductions)

The entries in your ledger should match the information on the payroll register. When you do payroll reconciliation, you verify that both records are identical.

What is payroll reconciliation?

Each pay period, your payroll must balance with your ledger’s payroll expense and liability accounts. Payroll reconciliation is the process of verifying that the payroll register agrees with the amounts recorded in the general ledger (by employee and in total) before you submit payroll. The payroll reconciliation process helps you keep accurate accounting records, which are necessary for tax filing and measuring financial health. You confirm that the transactions in your books equal the payroll register and that each transaction hits the correct ledger account.

Your goal is to ensure:

• Gross pay = Net pay + Employee withholdings (taxes/deductions)
• Employer payroll tax expense is recorded and credited to the correct tax payable accounts
• Cash (or payroll clearing) reflects the total net pay disbursed

When you reconcile payroll, ensure you record the correct amount for each employee. And, look to see if each transaction was recorded in the correct ledger account.

Check that all the accounts affected by a paycheck agree with the gross earnings. This includes payroll expenses as well as withholdings and employer liabilities.

Let’s say an employee earns $2,000 during a payroll period. The employee does not receive the entire amount they earn. Some of the money goes towards taxes and other withholdings.

This employee receives $1,600 after withholdings. The remaining money goes towards Social Security, Medicare, income taxes, and insurance deductions.

You must ensure you recorded all payroll accounting transactions accurately in your books. Expenses and liabilities need to be debited and credited correctly, and the calculations must tie out.

How to do payroll reconciliation

There are several things to remember when reconciling payroll to general ledger entries. You should reconcile payroll before submitting payroll and giving employees their checks. It’s much harder to fix errors after you pay employees. Reconcile payroll at least two days before payday.

Before you start, gather:

• Current payroll register and prior-period register
• Approved time cards/attendance records
• Employee pay rates and any recent changes
• Deduction and garnishment authorizations
• Employer tax rates and settings
• Your chart of accounts and prior payroll journal entries

When you reconcile payroll, check that these details are correct:

• Withholdings and deductions
• Employer taxes
• Hours worked, including overtime, vacation time, sick days, etc.
• Wages and salaries

Make sure the numbers you recorded are reasonable, and compare them to past payrolls for variance. If there is a large difference, identify the cause (rate changes, new hires, PTO, overtime), and confirm each related transaction.

How to reconcile payroll

The reconciliation of payroll doesn’t have to be difficult for small business owners. Use the following steps to reconcile payroll.

0. Gather and review documents (pre-check)

Confirm you have the payroll register, approved time, current rates, and deduction/tax settings. Resolve missing approvals or rate changes before you proceed.

1. Print out your payroll register

The payroll register summarizes each employee’s wages and deductions for the pay period.

2. Match each hourly employee’s time card to the pay register

Confirm that you entered the hours for each employee correctly. The hours entered should match the employee’s time card. Don’t forget to differentiate regular and overtime hours, as well as vacation and sick time.

3. Make sure the pay rates and salaries for each employee are correct

Account for overtime pay, double time, and unpaid time that would normally be paid. Also, make sure all pay rates are current, such as if you gave an employee a raise last pay period.

4. Check that you took all deductions out of employee paychecks

Make sure any new deductions were taken out, like if you get a wage garnishment for an employee. Also, check if you were supposed to change or stop deducting any amounts.

5. Make entries in the general ledger according to your payroll register

You can make one payroll entry showing the payroll sum for the period. Here is how you will record debits and credits in the general ledger:

• Record salary and wage costs as a payroll expense with a debit (gross pay).
• List the total for each type of employee withholding (e.g., federal income tax, Social Security, Medicare, state/local tax, benefits/garnishments) with a credit to the related liability accounts.
• Record the employer share of payroll taxes as an expense with a debit, and credit the related employer tax payable liability accounts.
• Record net pay with a credit to Cash (or Wages Payable/Payroll Clearing if you fund separately).

Example payroll journal entry

• Employee gross wages: $2,000
• Employee withholdings: $400 (FIT, FICA, benefits, etc.)
• Employer payroll taxes: $150
• Net pay: $1,600

Entry:

• Debit Wages Expense $2,000
• Debit Employer Payroll Tax Expense $150
• Credit Employee Withholdings Payable $400
• Credit Employer Payroll Taxes Payable $150
• Credit Cash (or Payroll Clearing) $1,600

Check: $2,000 gross = $1,600 net + $400 withholdings; employer tax expense is separate and credited to its own payable.

Tip: If you use a payroll clearing account, reconcile that account to $0 after the payroll disbursements clear the bank.

Make sure the payroll expenses match entries you made in your books and checks you issued. If the information matches, there are no mistakes with your payroll. After you reconcile payroll, submit payroll and pay your employees.

When to reconcile payroll (common cadence)

• Per pay period (pre-payday): Verify time, rates, deductions, taxes, totals, and post the journal entry.
• Monthly: Tie total gross, net, and liabilities to your GL; reconcile your payroll bank or clearing account.
• Quarterly: Reconcile federal/state payroll tax liabilities to filed Forms 941 (and state returns).
• Year-end: Final tie-out of totals to Forms W-2/W-3, 940 (FUTA), and any state/local wage reports.

Common discrepancies and quick fixes

• Mismatched hours or PTO: Re-check approved time; update and rerun the payroll register.
• Wrong pay rate or missed raise: Correct the rate; process an adjustment payroll or off-cycle check.
• Missing/incorrect deductions or garnishments: Update deduction settings; calculate makeup withholdings per order rules.
• Employer tax variances: Confirm tax setup (rates, SUTA, locality) and employee work/residence locations.
• Out-of-balance journal entry: Re-foot gross = net + withholdings; include employer tax expense and separate payables.
• Bank mismatch for net pay: Confirm funding date/amounts; reconcile payroll clearing to zero after checks/ACH clear.

Payroll Software features: How Patriot Software helps with reconciliation

If you’re spending too much time reconciling payroll by hand, software can prevent errors and speed up the process. Patriot Software is built for small businesses that want accounting and payroll to work together without a complex setup.

• Automatic payroll journal entries: When you use both Patriot’s accounting and payroll software products, the payroll posts summarized payroll entries directly to accounting with correct debits/credits and liability accounts.
• Clear payroll reports: Run payroll registers and detailed reports each pay run to verify hours, rates, withholdings, and employer taxes.
• Account reconciliation: Compare your statements to your recorded software transactions and reconcile differences in Patriot’s accounting software.
• Year-end filings: Streamline W-2 and tax filings to match your year-to-date totals.
• Grows with you: Affordable pricing and flexible plans.
• Support you can reach: Free, USA-based support when you need help.

Payroll reconciliation FAQs

Need a simple way to record payroll and other transactions in your books? Patriot’s online accounting software is easy to use and made for small business owners and their accountants. We offer free, USA-based support. Try it for free today.

This article has been updated from its original publication date of September 8, 2017.

This is not intended as legal advice; for more information, please click here.