Payroll administration is a specialized section of accounting. Payroll software lightens the burden on many employers significantly. If used properly, a payroll system can add value to the business.

The biggest source of revenues for tax authorities is employee tax. Tax regimes are mindful of this, so regular audits and inspections are conducted on the payrolls of businesses.

A common discrepancy is the variance in total salaries for a year, in the income statement of the business, and the actual salaries paid. When business tax returns are furnished, the salaries amount may differ from payroll salaries declared for tax. The relevant tax office could identify this anomaly, and demand an audit. Stiff penalties could be levied.

Since software makes life easy, many users may be unfamiliar with the double entry that should integrate with the accounting system, which in turn is relevant for tax returns. A manual process of double-checking payroll totals and how it relates to the accounting system should be performed.

Please note that cash or bank payments to employees do not constitute total salaries. This is a common mistake and leads to numerous problems later on. I will expound by way of this example below,

Salaries and wages DR Taxes and other deductions CR Bank/cash (difference between the two above) CR

Taxes and deductions DR Bank/cash CR

Analyze payroll schedules carefully, and determine if it conforms to the above sequence. If it does not, than that explains why your payroll does not balance with your ledgers and/or salaries expense.

For a large payroll, the help of a payroll accountant will be needed. The software supplier should ensure that the payroll software interfaces with the accounting software, or alternatively, produces accurate reports that enables bookkeeper to post the transactions to the accounting books.

A majority of audits on small to medium sized businesses targets tax, salaries and special perk discrepancies. Annual reviews of payroll figures will go a long way in addressing the above-mentioned shortcomings.