If you’re a business owner with employees, chances are you deal with payroll routinely. Part of that involves keeping your books accurate and compliant.
Since multiple laws are relevant to payroll taxes and benefits, payroll accounting can be a complex process. Between paying different types of workers and reporting upkeep, payroll can quickly drain much needed resources for your business.
Read on for tips on for what you need to know to set up your payroll process.
As a small business owner, you record your payroll expenses in your books using payroll journal entries. Entries entered in your payroll account include the following:
To get yourself ready to pay employees, use this checklist as a starting guide.
To avoid common errors, it is best to set up a system for calculating paychecks. The formula for calculating net pay for an employee is:
Net Pay = Employee Gross Pay – (Employee portion of Social Security + Medicare + Federal withholding + Other Deductions)
If you’re unsure of where to find update to date resources to help you get started on paying your employees, feel free to reach out to us for the latest information.
You will need to set up payroll accounts on your chart of accounts list to record payroll. The chart of accounts is a list of accounts used to organize all your business’ financial transactions.
The accounts you will need to set up will generally be an expense or liability account. An expense is a cost incurred from doing business. A liability is money that you owe to others. An asset is cash.
You will need to set up these common accounts on your chart of accounts to track all to track payroll-related activities.
|Account Name||Account Type||Increase By||Decrease By|
|Health Insurance (Employer’s Portion)||Expense||Debit||Credit|
|401K Employer Match||Expense||Debit||Credit|
|State Disability Payable||Liability||Credit||Debit|
|Health Insurance (Employee’s Portion)||Liability||Credit||Debit|
|401K Employee Contribution||Liability||Credit||Debit|
|Accrued Vacation Payable||Liability||Credit||Debit|
|Accrued Sick Payable||Liability||Credit||Debit|
In general, you will debit Gross Wage Expense, credit all of the liability accounts, and credit the cash account when you record payroll. To understand the basics of payroll accounting, look at the following journal entry for a $1,000 payroll:
Expenses (gross wages) are debited. Liabilities (federal withholding, state withholding, FICA Payable) are credited.
After you pay the employee, you will need to make another entry. Your liabilities decrease (debit) since you no longer owe wages. Your cash decrease (credit) because you paid the employee.
When you pay employer taxes, you need to make more journal entries. You need to reverse the payable entries with a debit and decrease the cash account with a credit.
|FICA (Employer Portion) Payable||120|
|Federal Unemployment Payable||10|
|State Unemployment Payable||25|
If you don’t want to spend time recording manual journal entries, we can help you set up your payroll process. Not only will it make your payroll process more manageable, but it will minimize common errors.
Payroll reporting requirements varies at the federal, state, and local levels. You should double check what the requirements are for your particular state and local area. For simplicity, we’re going to look at the requirements for federal.
Below are the tax forms you need to complete in order to file.