Is the balance in your payroll liability accounts ever-increasing, with no explanation why? Do you have liability accounts with large debit balances? In this article, we will discuss how to tackle those problem accounts that keep you up at night.

Most local government agencies have too much to do, with inadequate staffing, resulting in certain reconciliations falling by the wayside. Payroll liabilities reconciliations happen to be some of the most common. If your systems are properly setup, the reconciliation process can be fairly straightforward. However, payroll or A/P posting issues can get quickly out of hand and if not frequently reconciled, these accounts can result in potential audit issues, and a large cleanup project for finance staff, with already limited time. Here are a few tips for getting your payroll liability accounts reconciled and incorporated a reconciliation process into your month-end close.

1. Gain an understanding of each accounts’ usual activity.

Begin by identifying which accounts have liabilities recorded through the payroll process and whether the accounts have liabilities that are paid out with each payroll cycle or monthly. Additionally, determine which payees or vendors are paid within each account. Having an expectation of the timing, number of payments, and which vendors relate to which accounts, can help to quickly discern whether payments may be misapplied or delayed.

2. Identify any accounts that do not have properly clearing invoices.

Benefit payments to vendors can be miscoded through the A/P process, resulting in the need for reclasses. Review the monthly or semi-monthly accruals and payments to determine whether the amounts are clearing.  Large increases or decreases in the monthly account balance may indicate in an invoice being recorded to the wrong account and should be reviewed for a possible reclass. For any smaller variances, determine whether there may have been changes to employee deductions/benefits that need to be communicated to the insurance companies or other payees.

3. Determine the need for potential write-off of beginning balances.

Any large beginning balances should be reviewed for possible errors. Oftentimes large beginning balances indicate errors carried over from prior years. Large debit balances are likely from payments misapplied to the accounts, or possible overpayments that were not identified in a timely manner. In most cases these overpayments will not be recouped.  Any large credits could be due to payments being miscoded to different accounts. Due to the nature of payroll liabilities, these accounts should reasonably not have much more than a month paid/prepaid at a time. Year-end is a great time to clean up these balances. Write-off the account balances by identifying:

  • If deductions have been collected, but invoices need to be paid at year-end, a liability should exist for the amount collected, but yet to be paid.
  • If all deductions have been collected and all invoices have been paid (12 months) for the year, its reasonable to expect a $0 balance (or near $0 balance) in the liability account.

4. Perform a consistent review going forward.

Once the cleanup process is completed, there should be a process in place to make sure the liabilities posted to the accounts through payroll are clearing properly and any potential variances are identified.  This should take place at least monthly to ensure that any issues are identified and corrected early.

Identifying any potential payment issues early can prevent overpayment and save precious time and money.   While cleaning up payroll liabilities at year-end can be a bit of a headache, reconciling monthly will significantly speed up your closing and audit preparation process.  If you have limited resources and need support implementing a payroll reconciliation process, don’t be afraid to seek outside assistance, giving your team the time to focus on the day-to-day operations. Contact LSL today!

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