How to Reconcile Employee Wage Payments in Xero

JH Bookkeeping Solutions
May 1
2 min read

Reconciling employee wage payments in Xero might seem straightforward—but there’s a common pitfall that can lead to inaccurate reporting and skewed financials: coding wage payments to the wrong account. In this guide, we’ll show you how to correctly reconcile wages, why the "Wages Payable" account is the right place to code them, and how to avoid a costly bookkeeping mistake.

Step-by-Step: Reconciling Wage Payments in Xero

When it’s time to match your bank transactions for employee wage payments, here’s the correct process:

1. Go to the Bank Reconciliation Screen

Navigate to your bank account in Xero and find the line item showing the net wage payment to your employee (e.g., $1,500 to John Smith).

2. Select 'Find & Match' or Create a New Transaction

If your bookkeeper has posted the payrun and created a spend money transaction on your behalf, Xero will show a matching Spend Money transaction linked to the pay run.
If no match appears, this likely means the transaction wasn't created when the pay run was filed. In that case, click ‘Create’ and manually enter a new Spend Money transaction, coding it to the correct account as outlined in Step 3.

3. Code the Payment to the Wages Payable Account

Account: Wages Payable (or Payroll Clearing Account, depending on your chart of accounts naming)
Tax Rate: BAS Excluded (This is crucial—payroll payments are not subject to GST)
Description: Add a clear reference, such as "Net wages – [Pay period]"
Use the employee's name as the Contact (Who)

4. Confirm and Reconcile

Check everything looks right, then click OK to reconcile the transaction.

Why Not Use the ‘Wages & Salaries’ Expense Account?

This is where many business owners go wrong. It’s important to understand:

The Wages Expense Has Already Been Accounted For

When you post a pay run in Xero Payroll, the system automatically:

Debits the Wages & Salaries expense account (recognising the cost of wages)
Credits Wages Payable (creating a liability for the net wages you owe)

If you also code the bank payment to Wages & Salaries, you’re doubling up the expense—this overstates your wage costs and distorts your profit & loss report.

Pro Tip: Keep Payroll Liability Accounts Tidy

If you notice your Wages Payable balance isn’t clearing out as expected, it’s a sign something’s been coded incorrectly. Regularly check that:

Pay runs are posted correctly
Wage payments are reconciled to the liability account
Superannuation and tax payments are allocated to their respective liability accounts

In Summary

When reconciling employee wage payments in Xero:

Always code to Wages Payable, not the wages expense
Use the BAS Excluded tax code
Let the payroll system handle expense recognition—your job at reconciliation is to match the payment to the liability

Doing it right keeps your financials clean, your reports accurate, and your BAS obligations under control.