Definition of Payroll Reversal

December 14, 2023
Payroll Reversal

A payroll reversal is a process that involves asking the employee’s bank to refund an incorrect payroll direct deposit or check.

What is a payroll reversal?

A payroll reversal is a process of sending a request to a receiving bank to reverse the original deposit transaction. Typically this process is a banking remediation in response to a customer request. Said differently, it is pulling back funds from an employee that were sent via direct deposit through payroll when they shouldn’t have originally been sent.

Common examples of when to use a payroll reversal include:

  • Crediting an employee with the wrong payment amount
  • Sending money to the wrong bank account
  • Transferring a duplicate payment
  • Voiding incorrectly filled checks

Why does payroll reversal matter to your business?

Sometimes, you must use a reversal to ensure the books are balanced. Improperly adjusting payroll without noting a payroll reversal can create multiple cash flow and taxation issues.

What is the payroll reversal process?

In most cases, a reversal transaction is simple. If you use payroll software, you should have the option for a payment reversal in the item’s journal entry. Depending on your chosen program, you may have multiple options for resolving the error. For example, if you need to adjust an overpayment, you may be able to deduct the excess amount from the employee’s next paycheck.

In the case of a worker refund, you would want to ensure that future payroll funds are not affected and may want to void the payment instead.

How long does a reversal transaction take?

Generally, a worker’s bank account has up to five days to reverse the transaction once they receive your notice. However, keep in mind that in most cases, you also have five days to request the reversal from the moment the direct deposit is sent.

If you are in a restricted state such as New York or California, you need to notify the employee, and the state may require employee consent. Therefore, be sure you are familiar with the laws in the states where you do business.

Compliance Requirements for Payroll Records

Keeping detailed and accurate payroll records is a sound business practice and a compliance requirement. Businesses must maintain comprehensive records of information such as employee compensation, payroll taxes, deductions and benefits. The data helps to document HR compliance, , provide accurate payroll tax reporting, resolve disputes, support audits, and helps protect both employers and employees in case of legal or financial inquiries.

Certain federal, state, and local laws put certain responsibilities on businesses for payroll record creation, provision, preservation and retention. Requirements differ by jurisdiction and type of document, but some common concepts apply.

The Fair Labor Standards Act (FLSA) and the Internal Revenue Code (IRC) place recordkeeping demands on employers. Employers must keep records of the hours worked, wages paid, deductions taken and taxes withheld. These records must also include employee names, Social Security numbers, pay period dates, pay rates and other pertinent information. A list of the required information can be found on the Department of Labor's website.

State and local laws may have additional payroll record requirements. Some states and localities may require employers to provide more information and keep payroll records longer. To ensure compliance, businesses should know the relevant requirements in the locations in which they operate and in which employees work.

Applicable federal, state, and local legislation applies to other related paperwork, such as payroll tax filings, W-2 forms and employment contracts. The rules require businesses to provide and maintain records for certain periods of time, which may vary based on the type of document.

Penalties for failing to comply with payroll recordkeeping rules can be severe. Noncompliance may result in fines and penalties. It can also result in agency audits, inquiries and potential claims made by employees or government agencies.

Best Practices for Maintaining Payroll Records

Businesses should implement comprehensive payroll record practices. This sort of detail-oriented work requires following a strict regimen and best practices. Here are some ways to help you with retaining payroll records with the most accuracy and efficiency.

Use electronic systems

How you store payroll records matters. Because of their efficiency, accuracy and convenience, electronic systems (versus paper records) may be a best practice for storing payroll records. An electronic solution like payroll software can also simplify recordkeeping operations and can help minimize risk of data loss and quick information retrieval.

Conduct regular audits and reviews

Regular audits and reviews are effective practices for managing payroll records. Check for accuracy, look for missing records and monitor compliance. These proactive procedures help maintain the integrity and reliability of payroll information—and may prevent interactions with the agency.

Train payroll personnel

Payroll personnel training helps ensure that those involved have the essential skills and knowledge to manage payroll files effectively. This helps eliminate errors and compliance risks while maintaining correct employee payroll records.

Use documentation and recordkeeping policies

Policies for payroll record retention—and documentation of those policies—establish clear practices for consistent performance. They should be a handy guide when questions arise about maintaining compliance, performing audits and generating reports. When turnover occurs, the policies and documentation help a business train new employees and remain consistent.

Staying on Track with Payroll Records

When it comes to managing employee payroll records, you have a lot on your plate as an employer. There are many moving parts to recordkeeping. Without assistance, it can be easy to get overwhelmed.

Fortunately, TriNet offers comprehensive HR solutions including access to document management to help businesses centralize HR documents with access to intuitive self-service platform. In addition, with their expertise and help, businesses stay up to date with complex rules around recordkeeping, helps with compliance and mitigates certain HR risks. TriNet's services also helps facilitate seamless integration with other HR systems, syncing your data between platforms and the tools are designed to help ensure your connection are secure and accurate. With TriNet’s help, businesses can focus on their core operations while entrusting their payroll-related services to a trusted provider.

This communication is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance.

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