This article is part of a larger series on Payroll Services.
Parallel testing is the process of running the same payroll in two payroll systems to ensure that both have the same outputs. That means all the information regarding employee net pay, taxes (including year-to-date totals), benefit premiums withheld reported in the new software aligns with what is reported in the old system.
Every payroll system is slightly different, so you will need to make sure those differences do not skew your payroll results, as that could lead to IRS penalties.
How to Do Payroll Testing
Step 1: Document your current payroll process from beginning to end. You should start when your previous payroll closes all the way until your current payroll closes. One mistake that happens during testing is only examining the duties of your payroll processor(s). Everything that touches the payroll system needs to be tested, including how benefit elections are entered, along with compensation changes, tax withholdings, employee demographic information, etc., especially if your payroll system is also your HR system.
Step 2: Gather the necessary people. Similar to the first step, everybody who has a role to play in the payroll process (benefits, HR, and payroll) needs to be involved in the payroll testing process. At most small businesses, it may be a small team, so be sure to include the backups as well. The individuals involved in the overall payroll process will have the best understanding of a normal payroll process, and they can bring up the items that give them the most trouble.
Step 3: Ask for a payroll test environment. Most payroll software providers should be able to provide you with the “sandbox.”
The sandbox is an environment that mirrors the look and feel of payroll software but is used only for learning and testing purposes.
Working with your new payroll software provider, you should ensure that all of your consistent information is in the sandbox so that you only have to worry about pay period changes.
Step 4: Process payroll as normal. This can be done two ways: You can process your normal payroll and your test payroll simultaneously, or you can process your test payroll after your normal payroll is finalized. Many companies do not have the time and resources to process simultaneously, so they test payroll on the week after the normal payroll processing is completed. This includes entering personnel changes (e.g., new hires and terminations) and pay period items (e.g., hours worked and bonuses), as well as mirroring your payroll review process (e.g., checks paid outside of payroll and hourly employees’ timecards).
Step 5: Gather reports. Both payroll software (current and future) should be able to provide you payroll reports. These reports should indicate payroll totals, individual results for each employee, and sample pay stubs. Try to download reports that are in Excel format and a visual friendly format such as a PDF.
Step 6: Review results (within the old and new payroll software). We suggest beginning with your payroll total summary, starting with your gross payroll, net payroll, and total tax amounts.
- If the totals match, you can review the other category totals. These categories will include items such as regular earnings, overtime earnings, taxes paid to a specific state, 401(k) contributions, and medical benefit cost withholdings. If those amounts look correct, then you can be fairly certain that the testing was successful. We still recommend spot-checking several employee’s pay stubs to confirm your previous results.
- If the totals do not match, you should review the category totals to see which one(s) are not the same. Once you determine the categories, you can go into the employee details to see which specific cases are different. This information should be investigated and discussed with the new payroll provider if you can’t resolve. Some discrepancies are due to the input information not matching, user error, and/or a different calculation process for the payroll service. Once you and your provider figure out the root cause, then you need to document it, decide how to account for it moving forward, and retest.
Step 7: Redo steps 4–6 for at least another payroll cycle, if not two additional cycles. This ensures results are correct and accounts for any infrequent items (such as commission payments and once a month benefit deductions) before completely switching to the new software.
Step 8: Ask for help. If your payroll software provider offers implementation services, reach out to your specialist and see if they can be on-call, or schedule a call on your normal payroll processing date just in case.
Need step-by-step instructions on changing payroll providers? Check out our guide on how to switch payroll providers.
Common Errors and How to Handle Discrepancies
Here are some of the most common errors you will encounter moving to a new payroll system. Some tips on handling them are provided below:
Bad Data. One thing that needs to be checked is current problems in your legacy system. If you are constantly seeing error notices or have mismatched data (e.g., hourly employees with a salaried rate), these items should be fixed before transferring the information into the test system because one system’s method of dealing with errors may be different from another.
System Differences. Most payroll systems will calculate gross to net payments in a similar way since the rules are provided by the respective federal, state, or local governments. However, there are some calculations that may be different. These items can include vacation accruals, automatic pay, and scheduled deductions. You should schedule a separate call with both your legacy and new payroll system teams to get a breakdown of their setup and do a comparison.
If there are differences, then you will have a decision to make. You can ask the new system to do a custom configuration to match that part of your legacy system or you will have to train your payroll team member(s) on the new process. Once the decision is made, you can take a few sample employees (e.g., a salaried employee with a PTO accrual), and compare results.
User Error. If the error is due to data entry error, then now is a good time to determine if your process can be enhanced by your new payroll system or if additional training is needed.
- Instead of manually entering payroll data such as garnishments, maybe the information can be loaded in.
- If bonuses were being miscalculated, perhaps specific training on the one-time pay data system will be beneficial.
Other Errors. Some differences such as rounding errors can be expected, but there are other errors that are significant and cannot be figured out by your payroll processor(s). This needs to be brought to the service team of the new payroll software company to assist.
Need help selecting a solid payroll provider? Check out our top payroll service picks.
Parallel testing is an integral part of ensuring that your payroll software change goes smoothly. If you gather the right people for testing, load the appropriate information into the new payroll system, are careful to follow your normal payroll process, and have a detailed plan of comparing both payrolls using payroll reports, you will have minimal disruption when the change is finalized.