Many businesses outsource their payroll needs to companies such as ADP, Paychex, Qqest or some other company that handles payroll for businesses. However, many businesses do not properly account for their outsourced payroll transactions, which will produce inaccurate financials. In this video I will show you how to accurately record outsourced payroll in QuickBooks.
Understanding the difference between payroll liabilities and expenses
In short payroll liabilities are anything deducted from your employees check that will later be distributed. Things such as employee payroll taxes, 401k, medical etc. should all be considered payroll liabilities if they are deducted out of your employee's checks. The reason being you will withhold them from your employee's checks (setting up the liability) and later distribute them to some other entity (which zero's out the liability).
Payroll expenses are costs to the employer related to payroll. Gross wages, employer payroll taxes and payroll service fees are all examples of payroll expenses.
One common mistake we often see is that when an outsourced payroll company makes a deduction from a business banking account the bookkeeper automatically hits payroll expenses. However, as you can see in the illustration above the transactions are actually made up of payroll liabilities and payroll expenses. It is important to figure out what each transaction consists of by looking at the payroll reports provided to you from your outsourced payroll company.
Use vendors or memorized transactions to record outsourced payroll
I like to break up outsourced payroll into 5 groups:
Actual paper payroll checks - these transactions would be for any employee that actually receives a paper check and is not set up on direct deposit. It is important to find out from your payroll company if these will hit your bank account as a separate check or be grouped into the deduction the outsourced payroll company takes from your bank account. If these checks will clear your bank account you need to enter the actual check with the correct check number. This check will consist of gross wages (expense), employee payroll taxes (payroll liabilities) and any other deductions (payroll liabilities).
Direct deposits - any employee that is set up on direct deposit will fall into this category. Typically all direct deposits are deducted from your checking account as one transaction. This will consist of gross wages (expense), employee payroll taxes (payroll liabilities) and any other deductions (payroll liabilities).
Payroll taxes - your payroll taxes will consist of employee payroll taxes (payroll liabilities) and employer payroll taxes (payroll expenses).
Payroll fee - this is the fee your outsourced payroll company charges you for their services and should be coded as a payroll expense.
Other outside agencies - these transactions would be checks for 401k contributions, ROTH IRA contributions, garnishments etc.
The most important thing is to set up a vendor for each transaction that hits your business checking account from your outsourced payroll company. You will have to communicate with your payroll company or look at your checking account activity to determine how they are deducting outsourced payroll related transactions. I typically set up at least three vendors in QuickBooks: Payroll Wages, Payroll Taxes and Payroll fee. The reason I set up vendors is that the account details of those transactions will automatically be recalled when you enter the next payroll. Once you have a system down you just need to look at your payroll reports and plug in the correct numbers.
You can apply the same method by using QuickBooks memorized transactions. You could memorize your checks for payroll wages, payroll taxes, payroll fee and any other transactions related to your outsourced payroll.
Recording outsourced payroll in QuickBooks can be tricky at first. The most important thing is to find out how the various transactions will hit your bank account and to mirror that activity in QuickBooks. It is also important to understand the difference between payroll liabilities and expenses and how to properly record them in QuickBooks. If you incorrectly record your outsourced payroll it will result in inaccurate financials.