Payroll and Tax Accounting for Client Pay Runs

Payroll and tax accounting records gross wages, employee deductions and employer costs, then matches each liability to its payment. For a client pay run, reconcile the payroll reports to the general ledger before closing the period. A balanced journal alone cannot prove everyone was paid.

Identify the Pay Run and Source Records

Identify the employer, pay-run reference and pay period before preparing the reconciliation. Record the payday separately from the period employees worked. You need authorised access to payroll records and bank evidence, plus the client’s approval arrangements for corrections.

1. Obtain the final pay-run report, including gross wages, allowances, leave payments and net pay. Retain adjustment and off-cycle reports for the same period.
2. Request employee declaration settings and any withholding variations that affect the run. Keep sensitive declarations in the client’s restricted payroll records.
3. Collect the deduction report and evidence authorising each deduction. Request the employer super report, contribution submission and any rejection or refund notices.
4. Obtain the approved payment batch and bank statement. A payment file shows an instruction to pay. The statement shows whether money left the account.
5. Bring forward the last reconciled liability balances and their outstanding-item list. Match them to the opening general-ledger balances before adding this run.

The ATO’s PAYG withholding record guidance identifies declarations, payment records and Single Touch Payroll (STP) reports among the supporting records. Keep the report version used for the journal so a later rerun does not obscure what you posted.

Before continuing, confirm that the report totals cover the same employer and run as the payment batch. A report for one pay cycle cannot explain a bank batch containing two runs without a separate breakdown.

Separate Wages, Deductions and Employer Costs

Gross wages are the employee’s earnings before deductions. Net pay is the amount left for the employee after the deductions in that run. Employer super is a separate employer cost.

The Australian Taxation Office (ATO) explains that PAYG withholding takes tax from employee pay for later payment to the ATO. Record it as a liability. It is already part of gross wages, so charging it again to wage expense doubles that cost.

Separate other employee deductions by the party owed the money. A deduction due to a third party stays payable until remitted. Salary sacrifice and reimbursements need their own treatment and cannot all be grouped as ordinary after-tax deductions.

Use the super report’s qualifying earnings and the applicable contribution requirements. The ATO’s Payday Super guidance sets the statutory rate at 12% of qualifying earnings. Contributions generally must reach the employee’s fund within seven business days of payday, with extended timeframes for specified cases. Track fund receipt and rejected contributions as well as the bank payment.

State and territory payroll tax is a separate employer tax assessed under the relevant jurisdiction’s rules. Keep its expense and liability separate from PAYG withholding. Use the payroll tax guide for that assessment and return.

Record a Fictional Payroll Journal

Post the approved pay-run totals to the relevant expense and liability accounts before recording the payments. First check whether payroll already generated the journal. Adding a manual copy would double both expenses and liabilities.

This fictional aggregate pay run has $10,000 gross wages, $2,000 PAYG withholding and a $300 authorised after-tax deduction payable to a third party. Net pay is $7,700. Assume all $10,000 is qualifying earnings and the employer owes only the statutory 12% super contribution, or $1,200.

The $2,000 withholding is an invented report total, not a tax-table calculation for an individual employee. The example excludes salary sacrifice, reimbursements and leave provisions.

Pay-Run Accrual

Gross wages reconcile because $10,000 less $2,000 withholding and $300 deductions equals $7,700 net pay. Total employer expense is $11,200 in this example. The journal records the cost and amounts owed. It does not show any bank payment.

Payment Entries

Each payment reduces its liability without creating another expense. Where the client uses a clearing account, trace both sides of that account to the final payment. A clearing-account balance requires an explanation even if the expense accounts agree.

For reporting periods that end before payday, identify any wages earned but unpaid and assess the separate period-end accrual. Document its reversal so the later payroll journal does not recognise the same wages twice.

Reconcile Payroll Liabilities and Payments

Reconcile each liability using its opening balance, new amounts owed and payments allocated to it. Keep PAYG, super and other deductions on separate schedules. Combine them only after each schedule agrees.

1. Match the wage expense journal to the pay-run report. Explain any period-end accrual or account split.
2. Match net pay to the approved bank batch and statement. Identify rejected payments, separate employee payments and unpresented amounts individually.
3. Match PAYG added to the liability with payroll withholding reports. Trace later remittances through the activity statement and ATO account transaction record.
4. Match super added to the liability with the super report. Follow contributions through the payment service to fund receipt, including returns and unresolved rejections.
5. Reconcile the remaining deductions to the third-party payment records. Carry forward only identified unpaid amounts.

Fictional Liability Rollforward

Assume the same fictional employer starts with $800 PAYG payable and $600 super payable. During the period, it pays those prior balances and records the new run.

The closing amounts belong to the new run because the payments settled the opening balances. Retain the payment references that prove this allocation. A payment during the period does not necessarily settle that period’s payroll.

An activity-statement payment can cover more than PAYG withholding. Allocate the PAYG component using the lodged statement and ATO account record. Coding the whole bank payment to PAYG payable can create a false debit balance.

The expected result is a general-ledger balance supported by an itemised schedule. For super paid through an intermediary, separately identify any contribution still in transit. A bank debit alone does not establish that the fund received it on time.

Correct a Difference Before Closing

Trace the difference to a specific report, journal or payment before posting a correction. Avoid a balancing entry to wages expense that hides the cause.

Differences and Corrections

Preserve the original report and correction reference. Record the reason, approver and affected period, then rerun the reconciliation. If the underlying payroll is wrong, correct that record and assess the required STP correction as well as the ledger entry.

Fair Work’s record-keeping requirements permit changes to correct errors and prohibit false or misleading records. They require time and wage records to be kept for seven years. Keep the correction history with those records.

Review the Client’s Payroll Reconciliation

The reviewer must be able to reproduce the closing balances from the saved reports and payment evidence. Give them the final reconciliation and the original sources, including all adjustments.

Record the preparer’s identity and completion date, then record the reviewer and review date. The reviewer checks report totals against the journals and follows payment references to bank and remittance evidence. They also check that corrections address their cause and that outstanding super items receive prompt follow-up.

Keep unresolved client explanations in an exceptions list. Each item needs an amount, the affected account, the evidence requested, an owner and a follow-up date. A client’s statement that a payment was made stays unresolved until the payment can be traced.

The handover file needs the final pay-run reports, liability schedules, payment evidence, correction history and sign-off record. Retain declaration settings and deduction authorities with the restricted payroll records. The next accountant must be able to identify which balances remain unpaid without rebuilding the reconciliation.

Close the reconciliation when every closing balance has supporting items and the reviewer has recorded the outcome. If a difference remains unexplained, keep it open with an assigned action and tell the person responsible for the period-end accounts.