Why Is it So Important That Payroll Is Precise?

Your payroll represents an accounting system connecting your business, your employees and the various agencies that collect taxes on the sums you pay to your staff. It is important that payroll be precise, because this precision makes you fully accountable to your partners in the payroll process and enables you to fully satisfy your obligations to them. In addition, an accurate payroll can save you the stress and hassle of having to backtrack and straighten out your accounting system when tax time arrives.

Precise payroll accounting is an ethical issue. Hiring employees involves entering into a moral, contractual relationship obligating you to compensate them for their time relative to prearranged terms such as a salary or an hourly wage. Inaccurate payroll often involves failure to compensate employees fully, and it is a form of stealing from them by keeping funds that rightfully belong to them.

Accurate and precise payroll records document an important element of your company's finances and enable you to achieve consistency among various bookkeeping processes such as reconciling tax liabilities with cash flow projections, balance sheets and profit-and-loss statements. When your business presents its books to an outside party such as a loan officer or a potential investor, it is important for all of your records, including payroll, to be as accurate and precise as possible. Failure to resolve inconsistencies creates an impression of sloppy bookkeeping practices and lack of accountability.

Your business is required to withhold a range of taxes from employee paychecks, including state and federal income tax, and Social Security and Medicare taxes. Your ability to report and pay these taxes accurately depends on having precise payroll records that honestly represent your company's payroll activity. Failure to maintain precise payroll records may result in time-consuming and expensive accounting chores. In addition, inconsistent or inaccurate payroll accounting may cause your business to accrue expensive penalties and may raise your risk of a tax audit.

Payroll accounting provides you with valuable information that helps you to determine whether your company is earning a profit and, if not, where you are spending too much. Ideal payroll percentages vary for different industries, but any business that is not earning a profit or is earning insufficient profit should evaluate its payroll costs relative to its gross revenue and explore ways to introduce efficiencies that can improve profitability. Accurate payroll information is a vital tool for making these assessments and introducing cost-saving changes.