Accounting for Payroll

Business owners face many challenges when running a business. Two of the more critical tasks of business operations are accurately processing payroll and proper accounting practices. Let’s take a look on how accounting for payroll works.

How do I record my payroll in my accounting system (Quickbooks, Xero, Peachtree, etc)?

Payroll is one of your businesses’ largest expenses, so it is critical that you are recording your payroll expense appropriately in your accounting or general ledger system. Since you, as the business owner, are ultimately liable for all payroll, taxes and employee liabilities, you will want to ensure that you are tracking this all appropriately. Further, payroll must be posted correctly so that your CPA can take these deductions appropriately on your annual tax return.

While there are multiple ways to do everything in accounting, this article will give you a general idea of how to record your payroll in your accounting system each payroll.

What is an accounting system?

The most used accounting system for small businesses is Quickbooks or Quickbooks online. Other systems include Xero and PeachTree. Larger businesses generally use a “ERP” software that includes all accounting systems for their business. Regardless of which accounting system you use, the general principles remain the same; expenses are deductible and liabilities are owed to others – both must be posted and tracked appropriately.

What are the components of payroll?

Payroll is made up of many types of accounting entries including expenses, liabilities, and bank transactions. Let’s take a look at each category below.

Bank Transactions

Each payroll, Paper Trails deducts a large amount from your bank account to cover all payroll, taxes and other components of payroll. We do this as one lump sum and you must then break down this withdrawal in a check or journal entry so that this deduction is allocated in your accounting system appropriately. Rarely, there may be reversals or credits to your bank account. These should also be allocated appropriately.

Wages

Gross wages are always an expense in your books. Wages must reconcile on your books, annual corporate tax return and with the payroll tax returns that are filed by Paper Trails. Be sure that you are posting wages on your books to a specific expense account. No other payroll items (as listed below) should be posted to wages. Wages must be totaled and filed on the Form W-3 at year end.

Employer Taxes

The employer portion only of payroll taxes, which are Social Security, Medicare and Federal and State Unemployment taxes, should be posted to their own expense account on your books. These too should reconcile with payroll tax returns and your corporate tax return at year end so it is important that these are posted separately and correctly.

Reimbursements

If you are reimbursing employees for business expenses, such as mileage, travel or office supplies, these should be posted to their respective expense accounts in your accounting system. Since there are very specific rules about expense reimbursements, be sure you have accurate documentation to backup reimbursements. Remember, health insurance reimbursements have their own rules and regulations that are VERY strict.

Retirement/Benefit Matches

If Paper Trails is submitting retirement or benefit payments on your behalf, either by check or ACH payment, you will need to post these to their respective expense accounts in your accounting software. If you are making these payments, you will post the expense when you make the payment.

Payroll Processing Fees

The fees that Paper Trails bills you for our services are deductible and should be posted either to “Professional Fees” or another specific expense category in your accounting system.

Insurance Contributions

If your employees are contributing to their insurance premiums, you can either post these as an outstanding liability OR as a credit to your insurance EXPENSE account to reduce the company expense on your books. This is completely up to you how you want to track these contributions.

Employee Advances

Did you give your employees a loan or advance and now need to collect it? You will need to post this credit to your books as you are recouping these funds.

Garnishments

While Paper Trails generally will make all garnishment payments on your behalf, if we are not, you must post these as an outstanding liability on your balance sheet. Be sure to make these garnishment payments timely to avoid penalties.

Tips

If your employees are tipped and you are paying credit card tips through payroll, you will likely have a liability on your balance sheet until these are paid through payroll. If you are paying credit card tips or other gratuities through payroll, you will want to post a DEBIT to these liabilities as you pay these out in payroll. Tips ARE NOT wages, and must be posted appropriately so that they are being accounted for.

Employee Share of Taxes

Since Paper Trails makes all tax payments on your behalf as well as the employee share of taxes, like income tax withholdings, Social Security & Medicare tax, these items do not need to be posted anywhere on your books. If you are paying any of these taxes (not likely with our service), they would be posted as a liability on your balance sheet.

How do I record my payroll?

Now it comes down to brass tax and you must actually post the payroll in your accounting software. Most folks will either post a check with the appropriate breakdown in their accounting system OR they will create a journal entry to record the transaction.

Below, please find a SAMPLE journal entry that shows you appropriately how to post your payroll in your accounting system. We can always help you create a General Ledger template in isolved that will make posting your payroll just a bit easier each payroll.

Since everyone’s payroll is different, we recommend if you have questions, to consult your tax advisor or CPA. They are ultimately the person who is filing your corporate tax return and will want to ensure that your bookkeeping is accurately recorded for tax purposes.