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What Is Payroll Accounting? How to Do Payroll Journal Entries

Financially, you must ensure that you’re compensating your employees and managing your payroll expenses appropriately. For example, a business pays its employees an hourly rate based on the number of hours they work each week. As the business pays its employees weekly, the payroll process will take place in the early days of the following work week. If a company uses calendar months for their accounting periods, it will accrue wages and benefits based on the last day of the month. Payroll accounting is the recording and tracking of all payroll transactions.

This includes individual employee compensation as well as payroll taxes, employer portions of federal benefit withholdings, employee benefit payments and other deductions. Payroll accounting refers to the system that organizations use to keep track of employee wages, benefits, payroll taxes and types of deductions. This information is used to create financial journal entries recorded on a GL for financial reporting and business-related purposes. The purpose of payroll accounting is to keep track of employee compensation and related payroll costs.

Payroll Administrator Herb Gordon

They may oversee all budgets and costs, or specialize in areas like supply chain or payroll. These specialists analyze spending, financial reports, budget efficiency, and performances to determine if and how the organization can improve its financial health. Payroll accountants manage an organization’s payroll responsibilities.

You would just total the wages and make one journal entry and total the payroll tax expense and make one journal entry for that. It is not worth spending the whole day calculating the salaries of employees, taxes needed to be withheld and so on. The modern payroll accounting automation software allows you to correctly and quickly calculate the wages, salaries, and taxes and even automatically process payroll. Thanks to cloud hosting, you can calculate taxes and salaries anytime and anywhere. The payroll software simplifies many other tasks and offers other benefits for employees and employers.

Employers with gross sales of $500,000 or more per year are subject to the requirements of the Fair Labor Standards Act (FLSA) passed in 1938. This is a U.S. law that protects workers from certain unfair pay practices. The FLSA sets out various labor regulations, including minimum wages, requirements for overtime pay, and limitations on child labor. For example, FLSA rules specify when workers are considered on the clock and when they should be paid overtime. The employee inputs their hours through an API, and their pay is processed and deposited into their bank accounts. Popular solutions, such as Gusto and OnPay, have a base price of around $40 per month.

However, it still requires human interventions and regular audits. Using the right payroll system like QuickBooks Payroll makes documenting your financial transactions and maintaining records simple. You would also be able to see the gross wages paid, payroll taxes, deductions, and net pay. Below is a list of the accounts you will generally need to set up on your chart of accounts to track all payroll-related activities, along with a brief description of each account. 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. The accounts that you need to set up to track payroll will generally be an expense account or a liability account.

Initial recordings, also known as the originating entry, are the primary entries for payroll accounting. As you do your payroll accounting, how to calculate sales tax on gross income record debits and credits in the ledger. Whether you debit or credit a payroll entry depends on the type of transaction made.

A Simple Guide to Payroll Accounting

Payroll can differ from one pay period to another because of overtime, sick pay, and other variables. Payroll accounting allows your team to get an accurate overview of the cost of paying employees. With the right payroll software, you can expand your workforce and cater to businesses of different sizes.

Salaries and Wages

Once the company purchases the software, there are no additional monthly fees. Software programs usually include printable tax forms and withholding tables. One method for recording payroll is to create journal entries to account for each piece of payroll, including employee paychecks and employer taxes.

About Gusto Gusto is a modern, online people platform that provides more than 300,000 SMBs with the tools and services they need to hire, pay, insure, and support their teams. Gusto Embedded, a developer platform and support infrastructure, enables software platforms to offer in-app, modern payroll products to their customers as well. Smaller businesses may find it more convenient for human resources staff to oversee payroll functions, while bigger businesses and corporations often use a payroll accountant. The choice may depend on the number of workers a business has, and whether they are full time, part time, or contractors.

Asia Pacific Payroll Specialist

First, you need to set your company up with the IRS and obtain an EIN. Before you can process your first payroll run, you need to enter the information on your employee’s Form W-4 or Form W-9 into the software system. An essential piece of the payroll puzzle is maintaining accurate and organized records. At some point, the IRS may audit you and investigate to ensure that all of your employees are working legally and that you’re adhering to labor and payroll laws.

Other tax rates will be determined by Federal, state, or local laws and your employee’s W-4. 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.

For the uninitiated, payroll liabilities refer to the costs you pay for hiring and employing workers. On the other hand, payroll expenses involve all costs involved in your day-to-day payroll operations. If you’re overwhelmed with the many aspects of learning how to do payroll accounting, you’re not alone.

The payroll process has a lot of moving parts and it’s easy to make mistakes. Unfortunately, since a single misstep can be detrimental to your company, it’s crucial that you are aware of common mistakes so you can deftly maneuver around them. The process of running payroll with software mirrors the manual payroll method. Typically, companies that pay employees a minimum wage default to a weekly payment schedule.

If you don’t have a payroll system, check out our guide to doing payroll in excel. We have an easy to use template that makes processing payroll manually much simpler. It’s important to keep in mind that preparing payroll in Excel can be difficult if the business has more than a handful of employees. For example the annual maximum amount subject to the Social Security tax is referred to as the “annual wage limit”. It’s a fact of business—if a company has employees, it has to account for payroll and fringe benefits. Eventually, you need to pay employer taxes and remit withheld taxes.

Does the total gross wage expense entry tie to your total payroll expense for the period? Be sure to confirm that your debits equal your credits (basic accounting systems should confirm this). These entries show the amount of wages you owe to employees that have not yet been paid.