Payroll Accounting Basics

This information can be useful for improving your bottom line. Deduct the 7.65% FICA tax from the employee’s gross pay.

Here, you can directly account for your expenses and liabilities using what’s included above, and you can depict expenses by subtracting the amount withheld or eligible for taxation. First, you’ll need to register your business with the Internal Revenue Service to receive a Federal Employer Identification Number.

Hiring Payroll Accountant Job Description

He has earned a Bachelor of Arts in management from Walsh University. Devra Gartenstein is an omnivore who has published several vegan cookbooks. She has owned and run small food businesses for 30 years. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear.

• They pay 6.2% of your income, so the government gets 12.4% of your total income, and your employer pays 1.45% of your income toward Medicare.
• Expenses are costs your business incurs during operation.
• Note that in small businesses, payroll journal entries typically can be posted directly to the general ledger, since the transactions are relatively limited.
• When the units are sold in January, the $2,000 of labor will be part of January’s cost of goods sold which is an expense on the January’s income statement.
• Use this Payroll Accountant job description sample to advertise your vacancies and find the best candidates.
• In this article, we will outline what payroll accounting is, what’s included in payroll accounting, examples of this concept and how to start payroll accounting.
• An expense can be a liability, albeit temporarily, until it’s paid.

Payroll accounting is the specific accounting discipline concerned with calculating and disbursing compensation for company employees. Considerations must be made for payroll taxes, fringe benefits, garnishment issues and overtime pay, among other things. If companies offer automatic distributions into 401k plans or other investment accounts, or paid vacation time for employees, the job of payroll accountants becomes more complicated.

What Types Of Expenses Fall Under Payroll Accounting?

For example, if a manager’s salary is $48,000 per year and salaries are paid semimonthly, the manager’s gross pay will be $2,000 for each of the 24 pay periods. This is convenient for accounting purposes if the company prepares financial statements for each calendar month. Since liabilities are amounts that are owed but not yet paid, they should be posted as credits. For example, withholdings from employees’ paychecks and your portion of payroll taxes that are both waiting to be paid are liabilities and should be recorded as credits. It is quite common to have some amount of unpaid wages at the end of an accounting period, so you should accrue this expense . After recording this entry, you reverse it at the beginning of the following accounting period, and then record the actual payroll expense whenever it occurs.

This includes the annual salary, additional wages and overtime pay if applicable. If your employer offers overtime pay, check with your manager and human resources to ensure it’s been approved for a particular employee. You should also confirm which employees received a commission on deals they closed for the organization. Independent contractors are often referred to as non-employees. Hence, an independent contractor is not an employee, sole proprietor of the business, or business partner.

Definition Of Payroll Accounting

In most cases, payroll liabilities must be remitted to a third party, such as the IRS and the state revenue agency. Later, when you pay your employees’ withheld taxes, your portion of payroll taxes and any other payroll amounts owed, you will need to make another journal entry. This involves reducing the balance in your cash account by posting your paid liabilities as debits. By making these payments, you decrease your liabilities. But, you also lost cash because you made those payments.

This way, you can segment how pieces of the employees’ salaries are withheld other than tax purposes. When you or your bookkeeper goes to close the books for November, $700 will need to be recorded as a credit to be paid in your accrued payroll account.

Transition Accounting Periods

You also need to account for payroll expenses in your books. To ensure your accounting books are accurate, learn how to record payroll transactions. Payroll accounting is about recording your payroll expenses in your accounting system. These recordings are called “payroll journal entries,” which can be made in your payroll journal and then posted to your general ledger.

Payroll accountants use financial journal entries to summarize an organization’s transactions and total cash flow. Payroll entries fall under the scope of a general ledger that sorts all financial information. Once all payroll information is documented on an employee, human resources can pull this data and send it to their manager to add it to their performance evaluation. Payroll expenses are amounts that have been paid, such as salaries/wages processed for the current payroll period. Conversely, payroll liabilities are amounts owed but not yet paid — such as taxes withheld from employees’ wages and the employer’s portion of payroll taxes.

What Are Payroll Taxes?

She uses this extensive experience to answer your questions about payroll. Workest is here to empower small business with news, information, trends, and community. David Ingram has written for multiple publications since 2009, including “The Houston Chronicle” and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law.

The types of compensation you offer can determine the longevity of an employee, and the amount of effort required to perform tasks and projects assigned by their manager. A company employs a student to work a total of five days—from December 26 through December 30, 2020. The company issues the student’s payroll check on the next scheduled payday, January 5, 2021. You can see more details including journal entries at our free Explanation of Payroll Accounting. Once you’ve finished entering your journal entries, you should review them for accuracy before officially posting to the general ledger – many systems won’t let you reverse the entry. Download your free payroll chart of accounts list for future reference. Heather is a staff writer and payroll specialist with several years of experience working directly with small business owners.

Note that in small businesses, payroll journal entries typically can be posted directly to the general ledger, since the transactions are relatively limited. Large businesses, however, tend to have voluminous payrolls, which may clutter the general ledger. For this reason, large businesses often make detailed payroll journal entries in a payroll journal and then transfer the summary totals to the general ledger.

Or they can be recorded directly in your general ledger. Processing payroll can be complicated, but accounting software makes it a lot easier. It’s important to set up your payroll accounting process properly in order to get an accurate picture of your payroll expenses and to ensure compliance with labor and tax laws. Because you owe payroll amounts, you gain liabilities. Credit the FICA tax payable, federal income withholding payable, state income withholding payable, and any other withholdings on employee paychecks.

Payroll is a major expense for most businesses and is almost always deductible, meaning the expense can be deducted from gross income lowering the company’s taxable income. Payroll can differ from one pay period to another because of overtime, sick pay, and other variables. Payroll accounting is very different from other types of accounting, such as financial and managerial. Like financial accounting, payroll accounting involves recording and categorizing company transactions, but it focuses exclusively on employee-related expenses.

You may also need to pull reports for deductions, contributions, and other benefits. For example, if a credit increases an account, you will increase the opposite account with a debit. Payroll accountants are in charge of payroll operations in organizations. A sole proprietor is the owner of a business organized as a sole proprietorship and is not considered to be either an employee or an independent contractor.

• The first step is to calculate your employees’ gross pay.
• She has owned and run small food businesses for 30 years.
• Payroll accounting systems ensure that you not only keep careful track of your payroll expenses, but also comply with local, state, and federal employment laws and don’t run afoul of any tax rules.
• Calculating compensation can be relatively simple or fairly complex.
• The FICA tax rate is 7.65%—1.45% for Medicare and 6.2% for Social Security taxes.
• When you pay the employee, you no longer owe wages, so your liabilities decrease.

The amount of each employee’s paycheck depends on whether she is paid on an hourly or a salaried basis. Salaried workers earn a specific amount each week, regardless of whether they have worked more or less than a standard 40-hour work week. Once you’ve set up your payroll accounting system, you can process payments yourself or through a third-party payroll service.

A centralized software system is an indispensable way for you to file payroll information. This saves you a lot of time in all steps of the process such as submitting necessary payments and forms electronically, and it can send you reminders about upcoming deadlines on notable tasks. Once you have payroll processes down, you can compile all the forms you need employees to complete when you onboard them. This way, the information they fill out gets inserted directly into the payroll system. Understand the bandwidth you have when it comes to the benefits you can offer.

Follow this process as you make other remittances, such as for workers’ compensation, health insurance, and 401. The total debits should always equal the total credits.

The FLSA also sets out how to treat jobs that are primarily compensated by tipping. In the case of tipped service workers, the employer must pay the minimum wage to the employee unless they regularly receive more than $30 per month from gratuities.

They pay 6.2% of your income, so the government gets 12.4% of your total income, and your employer pays 1.45% of your income toward Medicare. Investopedia conducted an overview of accounting software for small businesses and evaluated their cost, ease of use, features, integrations, and scalability. QuickBooks Online was considered the best overall software, while Xero was considered the best for micro-business owners.