Payroll reconciliation guide for New Zealand employers 

Running a business in New Zealand means juggling what seems like hundreds of tasks at once. Between managing your team, looking after customers and planning for growth, admin often falls to the bottom of the list. But there is one admin task that you really can’t afford to overlook: payroll reconciliation.

It might sound like dry accounting jargon, but getting this right is the difference between smooth sailing and a stressful audit from Inland Revenue (IRD). Whether you have 15 staff or 150, accurate pay records build trust with your team and keep the tax department happy.

Payroll errors aren’t just an inconvenience. A recent report showed a major payroll blunder resulted in millions of dollars in underpayments for thousands of employees, a situation no employer wants to face. This highlights just how crucial accuracy is.

This guide breaks down the reconciliation process into clear, manageable steps specifically for Kiwi businesses. We will look at why it matters, how to do it efficiently and provide a checklist to help you get it right every time. We’ll cover the entire process, from verifying your initial data to what to expect if an auditor comes knocking.

What is payroll reconciliation?

Payroll reconciliation is the process of double-checking your calculations. It involves comparing your payroll system’s data against your general ledger and bank statements to make sure they all tell the same story. It is a critical internal control that confirms the accuracy and completeness of your payroll expenses.

Think of it as a safety net. You’re verifying that the amount you paid your employees matches what your payroll software says you paid them. It also confirms that the deductions you’ve calculated for PAYE, KiwiSaver, student loans and child support match what you actually owe to the IRD. It’s about ensuring every dollar is accounted for.

If these numbers don’t align, your financial records are incorrect. This can lead to underpaying staff, overpaying taxes or filing incorrect returns to the IRD. Catching these discrepancies early saves you from painful corrections later on. At its core, reconciliation is about ensuring the flow of money from your business account to your employees and to government agencies is precisely what it should be.

Why payroll reconciliation matters for employers

For employers, this process isn’t just about good bookkeeping. It is about meeting your legal obligations under the Employment Relations Act 2000. Your legal duty is to keep accurate wage and time records, and reconciliation is how you prove that accuracy.

When your payroll is reconciled correctly, you know that your payday filing obligations with the IRD are accurate. The IRD relies on the information you file every pay cycle to calculate social policy entitlements and tax obligations for your staff. If your data is wrong, it affects your employees’ lives outside of work too. Imagine an employee applying for a mortgage, only to find their income history is reported incorrectly. These are the real-world consequences of inaccurate payroll.

Beyond the legal side, it is about trust. Your team relies on you to pay them correctly and on time. Regular reconciliation catches errors before they become pay disputes, helping you maintain a positive relationship with your staff. When employees feel confident they are being paid accurately, it reduces stress and fosters a more positive workplace culture. It shows you respect their contribution and take your responsibilities as an employer seriously.

How often should you reconcile payroll?

The frequency of your reconciliation usually depends on your pay cycle. If you pay your team weekly, it’s recommended to reconcile weekly. If you pay fortnightly or monthly, you should align your reconciliation process with those dates.

Doing this every pay run might seem like a lot of work, but it’s much faster to check one pay run while the information is fresh than to unpick a year’s worth of data later. Finding a small error from last week takes minutes to fix. Finding that same error six months later can take hours of detective work, tracing back through reports and bank statements.

At a minimum, you must perform a full reconciliation at the end of the tax year (31 March). This is critical for finalising your financial statements and confirming that the total tax paid to the IRD matches your payroll records for the full year. This end-of-year reconciliation acts as a final check on all the pay runs throughout the year and is essential for accurate company tax returns.

Best practice for payroll reconciliation 

Consistency is key. Making reconciliation a standard part of your payroll process reduces the “admin dread” that comes with end-of-month or end-of-year reporting. When it becomes a routine habit, it feels less like a chore and more like a simple, logical step in your workflow.

When you reconcile regularly, audits become much less intimidating. You will have a clear trail of accurate data, showing exactly where every cent went. This level of organisation is invaluable if the Labour Inspectorate or IRD ever asks to review your records. You can respond to information requests quickly and with confidence, knowing your records are in order. This proactive approach demonstrates good governance and can make any audit process significantly smoother.

Step-by-step payroll reconciliation process

Reconciling payroll doesn’t need to be a headache. By following a logical flow, you can tick off the requirements quickly and move on to more important work. This step-by-step guide is tailored for New Zealand businesses, covering the specific elements you need to check.

1. Verify payroll data

Before you look at the bank, look at your payroll system. You need to check that the inputs are correct. The accuracy of your entire reconciliation depends on starting with correct payroll data.

Review any changes that happened during this pay period. Did you hire a new starter? Did someone leave? Check that hourly rates, salary changes and tax codes are updated. If an employee has changed their KiwiSaver rate or requested a new deduction, confirm that this is reflected in the system. A simple data entry mistake, like typing the wrong hourly rate, can cause ongoing issues if not caught early.

You should also check leave balances. If someone took annual leave, make sure it was deducted from their balance correctly. Under the Holidays Act 2003, keeping accurate leave records is mandatory. Errors in leave calculations are one of the most common payroll problems in New Zealand, so pay close attention to this area. Check both the leave taken and the rate at which it was paid.

2. Match payroll reports with bank transactions

Now compare your payroll reports against your bank statement. The net pay total in your payroll software should match the total amount that left your business bank account for wages. This is the moment of truth where your payroll records meet your financial reality.

Modern accounting software makes this easier by feeding bank feeds directly into your dashboard. If you use a system that integrates with these platforms, the matching process is often just a few clicks. The software will suggest matches between the payroll payment leaving your account and the corresponding payroll journal entry.

If the numbers don’t match, you likely have a processing error or a manual payment that wasn’t recorded. For example, did you make a one-off payment to an employee outside of the normal pay run? If so, it needs to be accounted for. A variance here is a red flag that requires immediate investigation.

3. Review PAYE, KiwiSaver and other deductions

This is where things often get tricky for NZ businesses. You need to confirm that the amounts deducted from employee pay for tax and other contributions are correct and match what you owe to the IRD. This step is vital for staying on the right side of the tax department.

Check your totals for:

• PAYE (Pay As You Earn) tax
• KiwiSaver (both employee deductions and employer contributions)
• Student loan repayments
• Child support payments
• ESCT (Employer Superannuation Contribution Tax)

These figures must match what you file with the IRD. If your software says you deducted $500 for KiwiSaver but you only remit $450 to the IRD, you have a problem that needs fixing immediately. This kind of discrepancy can lead to penalties and interest charges. It is also important to reconcile the employer contributions for KiwiSaver, as this is a direct expense to your business.

4. Identify and correct errors promptly

If you find a mismatch during steps 2 or 3, don’t ignore it. The longer an error sits in your system, the harder it is to fix. A small discrepancy can snowball over time, becoming a major headache to unravel.

Common fixes might include processing an adjustment in the next pay run or filing an amendment with the IRD. If you have underpaid an employee, process a top-up payment straight away and communicate clearly with them about what happened. Transparency goes a long way in maintaining trust. Explain the error, what caused it and how you have fixed it. If you have overpaid an employee, you need to follow a careful process to recover the funds, usually by discussing and agreeing on a repayment plan with them.

5. Record and archive payroll reconciliation reports

Once everything balances, save your reports. You need to keep wage and time records for at least six years under New Zealand law. This isn’t just a suggestion. It is a legal requirement.

Digital storage is acceptable and generally preferred for ease of access. If you are ever audited, having these documents ready to go shows that you take your obligations seriously and can significantly speed up the process.

Common payroll reconciliation errors (and how to avoid them)

Even with the best intentions, mistakes happen. Knowing the common pitfalls can help you avoid them. Here are a few specific to New Zealand that you should watch out for.

• Incorrect ESCT rates: Employer Superannuation Contribution Tax rates depend on how much the employee earns. If their salary increases significantly, their ESCT rate might change. Review these rates annually (usually 1 April) to avoid underpaying tax. Many payroll systems can help with this, but it’s the employer’s responsibility to get it right.
• Missed KiwiSaver updates: New employees or those returning from a savings suspension need to be set up correctly. Failing to restart deductions or enrolling someone who has opted out are common slip-ups. Also, remember that employer contributions are mandatory for eligible employees, unless they are on a savings suspension.
• Casual vs permanent holiday pay: Confusing the 8% Pay As You Go rules for casuals with the accrued leave entitlements for permanent staff is a frequent compliance issue. It’s really important that you understand how to calculate holiday pay for each employment type, so make sure you do your research.
• Manual data entry: Typing numbers from one system into another is the biggest cause of error. A single misplaced decimal point or transposed number can throw your entire reconciliation out of balance. Automation is your best defence here. Using integrated systems where data flows automatically between timesheets, payroll and accounting drastically reduces this risk.

Payroll reconciliation audit: what to expect

An audit can come from two directions: internal or external. Both are designed to verify accuracy, but their purpose and scope differ.

An internal audit is something you or your accountant might do, perhaps annually, to prepare for the end of the financial year. You’re looking for patterns of error or process inefficiencies. 

An internal audit might review a sample of pay runs in detail, checking calculations from start to finish to identify any systemic problems in your process. It’s a proactive way to find and fix issues before they become bigger problems.

An external audit usually comes from the IRD or the Labour Inspectorate. They will want to see evidence that you have paid at least the minimum wage for every hour worked and that you have calculated leave entitlements correctly. They will ask for your wage and time records, employment agreements and reconciliation reports. 

The IRD is focused on tax and deduction accuracy, while the Labour Inspectorate is focused on compliance with employment laws like the Minimum Wage Act 1983 and the Holidays Act.

If you have been reconciling your payroll every cycle and archiving your reports, you have nothing to panic about. You can hand over the requested files with confidence. Being organised and transparent makes the audit process much smoother and less stressful.

Streamline your payroll with Employment Hero

The easiest way to ace your reconciliation is to remove the manual work altogether. The more you can automate, the lower your risk of human error.

Employment Hero’s payroll software is built for New Zealand businesses. It handles the complex calculations for KiwiSaver, PAYE and holiday pay for you. Because the system integrates HR and payroll, employee details like pay rates and bank accounts flow directly into the pay run, reducing the risk of data entry errors.

With easy payday filing and seamless integration with accounting platforms like Xero, you can reconcile your payroll in minutes, not hours. The system generates all the reports you need, and the integration means your payroll journal is sent directly to your accounting software, ready to be matched against the bank payment.

The information in this article is current as at 30 December 2025, and has been prepared by Employment Hero Pty Ltd (ABN 11 160 047 709) and its related bodies corporate (Employment Hero). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional advice. Some information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and seek professional advice before making any decisions or relying on the information in this article.