How to Do Payroll Accounting: A Step-by-Step Guide for Employers

You’ll have to do this entire process for each hourly employee on your payroll. Now that you’ve set up the basics of payroll accounting, it’s time to complete all the essential paperwork for onboarding. The robust ezAccounting business task and payroll software has just released the latest version to simplify and streamline businesses in the US. Download and test drive today at no cost or obligation at halfpricesoft.com.

• Until the money comes out of your business’s account, that payroll is a liability.
• If you’re familiar with that process, then introducing a payroll journal entry into your routine should be like taking the training wheels off of a bike.
• You normally itemize gross pay, deductions, and net pay in a remittance advice that accompanies the paycheck.
• There are many different types of cloud-based accounting software available for small businesses.
• As you pay off amounts you owe, your assets (e.g., cash) decrease.

As you might be aware, employers are required to pay a portion of payroll taxes. Thus, in addition to these elements, the employer would need to account for the employer’s part of the payroll tax expense. Recording a payroll journal entry can either be done manually or through the use of accounting software. Either can get you the same results, but using accounting software is, by and large, the easier, more efficient way of getting there. Payroll journal entries are the optimal way to track these payroll expenses with minimal stress for in-person employees and any hybrid or remote staff you might employ.

Journal Entry to Record Accrued Vacation

Using a payroll service in the everyday happenings of the office is a great tool to help alleviate the complications of bookkeeping. Record employer-paid payroll taxes, such as the employer’s portion of FICA, FUTA, and SUTA. As I mentioned, I don’t owe FUTA and SUTA on Susie’s wages since I’m accruing payroll at the end of the year, after she’s earned more than $7,000 for the year. Here’s where the accrual calculation gets slightly hairy (I can confirm the candy isn’t affected.) Let’s calculate payroll taxes, contributions, and deductions for Susie.

• Note that for guidance or advice specific to your business, you should consult with a tax or legal professional.
• It lists the employee’s tax filing status, dependents, additional income, and other tax allowances.
• Instead of time-consuming manual payroll processes, some organizations opt for payroll software.
• Managing payroll for your business involves posting expenses and accruals to many accounts for withholding, payroll expenses, garnishments and federal tax liability.
• So for example, if A owes money to B, then C can be instructed to hold money due to A, and to pay the money withheld over to B.

Accounting for payroll gives you an accurate snapshot of your expenses. If you’re calculating payroll by hand with a payroll calculator and spreadsheet template, just make sure you enter your employee’s information correctly. The calculator or payroll template will do the tax calculations for you. “The payroll tax” is an umbrella term many people use to refer to taxes business owners must pay once they’ve hired employees. Most people don’t pay a premium for Part A (hospital insurance) since they likely paid into the program during their working years through the payroll tax.

Time Value of Money

You can earn our Payroll Accounting Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium payroll accounting materials. These include our flashcards, cheat sheet, quick tests, quick test with coaching, and more. Multiply the number of hours worked by the pay rate for each employee, also factoring in any overtime or shift differentials. This step may be addressed automatically by your payroll software. The employee inputs their hours through an API, and their pay is processed and deposited into their bank accounts.

Other Uses of the Term “Wages”

Set up enterprise structures, legal entities,
and organizations to create and maintain information related to people,
employment, and work structures. The setup also includes tasks to
define payroll business objects required for processing and costing
payroll, processing payments, and generating statutory reports. Again the control accounts should net to zero after the payments have been made, and any difference needs to be investigated before completing that periods payroll process. Any difference on this account should be reconciled by the payroll accounting team, as it means an employee has either been underpaid or overpaid.

Payroll Taxes

Recall our previous example of employees getting paid on January 17, from work they did January 2-15. On January 17, once employee wages are fully paid, those liabilities become expenses. There may be a number of additional employee deductions to include in this journal entry. For example, there may be opening times and prices deductions for 401(k) pension plans, health insurance, life insurance, vision insurance, and for the repayment of advances. Compare the amounts you entered to the information you have in your payroll reports. If your books don’t balance, retrace your steps to find your accounting mistake and fix it.

There are some accounts you may not need, like health insurance if it’s not offered and others that are required, like federal income tax payable, to comply with payroll laws. To get started, you’ll need to set up a chart of accounts and gather reports from your payroll system. Having the right information will ensure your payroll journal entries are accurate and save you from having to do correcting entries later. In that journal entry, you’re recording all of the deductions you have to take, as a business owner, from the employee’s check. For transparency and visibility, employees can find these deductions on their pay stubs. If you just hired a new employee, you need to learn how to calculate and pay payroll taxes, which include income, Social Security, and Medicare taxes.

Then employees receive their paychecks for that pay period on January 17. Until you pay employees, those wages are a liability because it’s money you owe. Instead, the easiest way to calculate payroll taxes is to turn them over to a financial expert like an accountant. Alternatively, since hiring outside help can be expensive, payroll software (including free payroll software) is a solid middle-of-the-road option.