Paycheck Review: A Technical Guide to Clean Business Records

The Operational Necessity of Paycheck Review

For small business owners, a paycheck review is not a cursory glance at net pay; it is a critical internal audit function. Maintaining clean business records requires reconciling gross-to-net calculations against the General Ledger (GL) to prevent tax penalties, labor law violations, and financial statement inaccuracies.

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1. Verify Gross Pay Components

The foundation of a clean record is the accurate categorization of earnings. You must audit the following:

• Regular vs. Overtime: Ensure non-exempt employees are paid 1.5x their regular rate for hours over 40 in a workweek, as mandated by the FLSA.
• Supplemental Wages: Verify that bonuses, commissions, and severance are identified separately, as they often carry a flat 22% federal supplemental withholding rate.
• Non-Taxable Reimbursements: Ensure expense reimbursements are not coded as wages to avoid unnecessary FICA tax liability.

2. Audit Statutory and Voluntary Deductions

Errors in deductions lead to significant liability during state and federal audits. Your review process must confirm:

Statutory Withholdings

• FICA: Confirm Social Security (6.2%) and Medicare (1.45%) are calculated correctly for both employer and employee portions.
• Federal/State Income Tax: Cross-reference withholdings against the employee's most recent Form W-4 or state equivalent.
• FUTA/SUTA: Ensure unemployment tax caps are monitored to prevent overpayment once an employee hits the annual wage base.

Voluntary Deductions

Verify that 401(k) contributions, health insurance premiums, and HSA allocations match the employee’s signed enrollment forms. Ensure pre-tax vs. post-tax treatments are applied correctly to the taxable wage base.

3. Reconcile Payroll to the General Ledger

Clean records require that your payroll journal entries match your bank statements. Every pay cycle, perform a three-way match:

1. Payroll Summary Report: Total gross pay, taxes, and deductions.
2. Bank Activity: Total ACH outgoings for net pay and tax impounds.
3. General Ledger: Proper debits to wage expenses and credits to cash and liability accounts.

4. Record Retention and Compliance

Under the FLSA and IRS guidelines, businesses must maintain specific records for at least three to four years. A successful paycheck review ends with the digital archiving of:

• Timecards and attendance records.
• Pay stubs showing all deductions and hourly rates.
• Tax deposit confirmations (Form 941 and 940 reconciliations).
• Canceled checks or ACH confirmation receipts.

Failure to maintain these records creates a rebuttable presumption against the employer in the event of a Department of Labor (DOL) wage and hour audit.