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A Payroll Accounting Intro & Guide For Business Owners

In 2016, research by Wasp Barcode Technologies showed that the two areas that are often delegated by business owners are tax preparation and payroll. This is hardly surprising since most business owners work to avoid hours of trawling through spreadsheets to check each spreadsheet cell for errors or discrepancies. This article will be a sort of payroll accounting intro and guide for business owners and anyone who’s new to payroll accounting.

What is payroll accounting?

Before we dive into the details, let’s define payroll accounting. Payroll accounting refers to the wages and other payments that you pay to employees during each of your payroll periods. Payroll accounting is the process of calculating and distributing wages and payroll taxes for employees.

Business owners usually run their payroll weekly, bi-weekly, or semi-monthly. Payroll accounting can be complicated. To process your payroll correctly, it’s best to be aware of the federal and state regulations that apply to your business and employees. After all, one of the easiest ways to make an employee angry is to pay them incorrectly. On the other hand, part of keeping your staff motivated involves paying them consistently and fairly for their work.

Types of payroll accounting entries

Given the importance of payroll in your business, it’s vital to get every detail correct. Processing payroll involves recording the various transactions that occur within each payroll period, including: 

  • Salaries, bonuses, commissions, and wages paid to employees
  • Federal and state income taxes, Social Security taxes, and Medicare tax deductions
  • Health insurance premiums, 401k contributions, wage garnishments
  • Your payments as employer for benefits like health insurance, 401k matching, and paid leave

Each payroll journal entry is recorded as expenses or liabilities, depending on whether they’ve been paid or will be paid at a later date. For example, salaries and wages that have already been paid are listed as expenses and recorded as debits. The salary and wage amounts remaining would be recorded as credit transactions since they are liabilities. 

Before you run payroll for your business…

Before you can process or run payroll for your employees, you’ll need to collect a few forms from them so you can calculate each employee’s withholdings.

  • Form W-4, the federal withholding form
  • Form I-9, Employment Eligibility Verification form
  • If applicable, your state withholding form

Types of payroll accounting entries

There are three types of journal entries that business owners will use as they work on their small business payroll accounting. These include initial recording, accrued wages, and manual payments and each of these have their own specific scenario.

Initial recording: This is also known as the originating entry. When a transaction occurs, you will include each employee’s gross earnings and withholdings, as well as record any employment taxes owed.

Accrued wages: Throughout each payroll period, you’ll record the wages owed to employees that have not been paid yet. Once you’ve paid these wages, you’ll make reversed entries into your company’s accounting ledger to record the payments.

Manual payments: This type of payment is less frequent because it involves adjusting an employee’s wages. As an example, you’d use a manual payment entry to record an employee promotion or employee termination.

How to do your own payroll accounting

While payroll can seem intimidating, it’s quite straightforward if you take the time to set up your accounts properly and are diligent in recording payroll transactions. 

Step 1: Set up your payroll accounts

The first thing you’ll do as part of your payroll accounting is set up your payroll accounts in your business’ chart of accounts (COA).  Typically, your payroll accounts will include the following:

  • Gross wage expense
  • Employee FICA taxes payable
  • Federal income tax payable
  • State income tax payable
  • Paid vacation payable
  • Employee health insurance payable
  • Wages payable

Step 2: Calculate payroll taxes & other deductions

After setting up your payroll accounts, you’ll need to determine how much to withhold from employee wages and also home much you’re supposed to contribute as the employer.

This is where it gets tricky for small business owners so be sure to check with your local and state payroll laws. Often, business owners find it easier to use payroll accounting software to handle the tax calculations for them, ensuring that every employee receives accurate wages.

Step 3: Compile payroll accounting reports

Manually running payroll reports is time-consuming and horribly inefficient, which is why most business owners use payroll software to analyze payroll journal entries and payroll taxes. In particular, your reports such as a payroll register and payroll tax report can provide you with insights that inform decisions on hiring or tax deductions.

Step 4: Record payroll journal entries 

If you don’t use accounting software like QuickBooks, you’ll need to manually input journal entries for payroll. When you record payroll, you’ll generally debit gross wage expenses, credit liability accounts, and credit cash accounts. When it’s time to review your financial reports, your gross wages will show up on your profit & loss statement or income statement, and the liability and cash accounts will appear on your balance sheet report.

Do you need help with payroll accounting? Contact MBS Accountancy!

At MBS Accountancy, we’re committed to providing full-service accounting services that help clients achieve long-term profitability and success. If you’d like to get help with your company’s accounting, please contact us. We’d love to learn how we can help you achieve financial success.

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