Payroll Accounting: Definition, Importance & Setup Process
Though some systems that incorporate more or less automation may not include all of these steps, the following process flow will apply to most payroll systems. Records of these transactions are available within the payroll solution for employers to download for record keeping purposes. Employers can access the information through various payroll reports, which they might run when responding to audits, investigating errors or providing documentation for other purposes. Popular solutions, such as Gusto and OnPay, have a base price of around $40 per month.
Step 3: Post Payroll Journal Entries to the General Ledger
Keep in mind that your debits (left side) should equal your credits (right side). You may also need to pull reports for deductions, contributions, and other benefits. If that’s not the case, you need to double-check the totals and locate the accounting mistakes. Before starting the hiring process, there are some important requirements or considerations that employers must fulfill.
How To Do Payroll Accounting With Overtime
Calculating tax withholding amounts, gross and net pay, and additional deductions is no easy task, but it has to get done. Using this payroll guide, we’ll walk you through the entire payroll process step by step. Keep reading to learn about the different processing methods or jump right to the section that’s most relevant to you. Pay misinformation is driving how to do payroll accounting a wedge between employers and employees. Discover the datasets comp experts are using to resolve this tension.
Gross Pay Calculation
An employer may have both liabilities and expenses for the same employee, due to paid time off. For example, say an employee has 24 hours of PTO and has already taken eight hours off. The remaining 16 hours are still owed to the employee and are, therefore, a liability to the company. Paychecks are then put into envelopes and sealed before being delivered to employees.
Step 12. Issue Paychecks
- Examinees with master’s degrees consistently post higher CPA exam pass rates.
- Some withholdings and the employer’s portion of FICA were remitted on payday; others are not due until a later date.
- The payroll tax that is actually an expense to an employer includes the actual employer contributions to Social Security and Medicare plus any state and federal unemployment taxes.
- We gave you some tips in prior steps to help check yourself along the way, but a payroll reconciliation is a more in-depth approach.
- Insurance Expense, Wages Expense, Advertising Expense, Interest Expense are expenses matched with the period of time in the heading of the income statement.
It is also common for employees to earn one week of vacation after one year of service. Many employers give their employees two weeks of vacation after three years of service, with more weeks given after 10 years of service. The amount withheld—and the employer’s portion—are reported as a current liability until the amounts are remitted to the government by the employer. Failure to remit the payroll taxes by their due dates can result in severe penalties. Throughout our explanation, bonuses paid to employees and sales commissions paid to employees will be considered to be part of salaries or wages.
- Most business owners choose to hire candidates with a Bachelor’s in accounting or a related field since this role is critical to your company’s well-being.
- Recording wages expense in the proper period is critical for accurate financial statements and therefore a very important part of payroll accounting.
- Beginning in 2013, there is a Medicare surtax of 0.9% that is applied to an employee’s wages and salaries in excess of specified amounts.
This is most common in finance and professional companies, but even then, it’s the least popular option. Typically, companies that pay employees a minimum wage default to a weekly payment schedule. “In some cases, the payroll schedule could be semi-weekly, monthly, or quarterly. At the end of each period, you must file and report your payroll, which happens to be in both quarterly and annual intervals, depending on the form,” says Garcia.
Step 3: Add new employees to your payroll software
Like you would for expenses, we suggest having a payroll liability account for each item. This allows you to more easily reconcile when the liability is paid. Payroll liabilities relate to expenses a business owes but hasn’t yet paid.
We will assume the amounts in the following Hourly Payroll Entry #4 were remitted on payday. It is also likely that the company will have the expense and the liability before the company actually pays the amount. This situation requires the company to record an adjusting entry in order to match the expense to the proper accounting period.
There are 3 types of journal entries under it, which are outlined below. The debit column represents what the company spent for a specific pay period and employee. The first debit (wage and salary) is the employee’s gross pay for the pay period. It comprises the employer’s FICA match and any federal or state unemployment tax.
They are in accordance with US federal legislation and may vary from state to state. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.