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QuickBooks Tip: Properly Recording Outsourced Payroll in QuickBooks

  
  
  

I have had a lot of inquiries lately about how to properly record payroll in QuickBooks when using an outsourced payroll company.  As we have stated before we highly recommend outsourcing your payroll to a trusted payroll company.  Many bookkeepers that don't know better record any payroll transactions that hit the bank account as a payroll expense and move on.  Unfortunately this is incorrect and causes inaccurate financial statements.  I will breakdown all the various transactions that typically occur with outsourced payroll and tell you how to properly account for them. 

Actual payroll checks

What I mean by actual payroll checks is those that are not issued via direct deposit into your employee's checking account.  Some payroll companies will take out one lump sum from your checking account to cover actual payroll checks, direct deposits, payroll taxes and their payroll fee.  If they do not then you will have to record each actual payroll check individually as that is how they will clear your checking account.  Record wages as a payroll expense and detail them out according to your chart of accounts detail (example: management wages, office wages etc).  Enter wages as a positive number in the check details.  All employee payroll taxes should hit a liability account called 'payroll taxes employee' and be entered as a negative number in the check detail.  Any deductions for 401K, cash advance etc should also be entered as a negative number and hit a payroll liability account.  The end result is that the amount of the payroll check should equal the amount that the check was written for (I know ingenious huh?)

Direct Deposits

There are two options for direct deposit checks and they will follow the same rules as actual payroll checks.  The only difference will be if you want to record each employee's direct deposit check individually or make one journal entry that details out all direct deposit payroll checks.  This will depend on your preference; if you want to be able to look up each individual employee's checks in QuickBooks or just rely on your payroll reports for this.  Again enter wages as an expense and a positive number, employee taxes as a payroll liability and a negative number and any other deductions as a payroll liability and a negative number.    

Payroll taxes

I have seen far too many bookkeepers complicate handling the payroll taxes portion of payroll.  It is actually quite simple.  Record the employee taxes portion as a positive number and hit the appropriate payroll liability account or accounts.  Record all employer payroll taxes as a positive number and hit the appropriate payroll taxes expense account or accounts.  That is it. 

Payroll service fee

Enter a check to a vendor to match the name of your outsourced payroll company.  Enter a check for the total amount of the payroll fee and enter it as an expense.

Check yourself

Obviously you would not be a good bookkeeper if you did not check your work right?  One way to check your work is to look at your chart of accounts and make sure all payroll liability accounts have balance of zero as they should.  Another way to check your work is to look at the amount your payroll company deducted from your checking account.  This should match the total of direct deposit checks, the amount paid out for payroll taxes (both employee and employer portions) and the amount of the payroll fee.  If your payroll company takes on the liability of actual payroll checks then the amount should also include that. 

This may seem like a lot of work to properly record your payroll in QuickBooks and you are correct.  You can save a lot of time by having your payroll company build a file that can import all payroll transactions into QuickBooks.  Once you get a payroll import file working it literally takes a few seconds to enter your payroll.  To find out more about payroll import files for QuickBooks read this.

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Comments

your instructions/comments are confusing. You state under Direct Deosit: "employee taxes as a payroll liability and a negative number" But under Payroll Taxes you state: "Record the employee taxes portion as a positive number and hit the appropriate payroll liability account or accounts".
Posted @ Wednesday, February 20, 2013 3:33 PM by Julia
Julia,  
Yes that is correct. When you are entering the direct deposits or checks the employee payroll taxes are entered as a negative number hitting the payroll liability account. This sets up the liability. Then when you pay the payroll taxes you hit the payroll liabilities account again, except this time it is a positive number. That leaves the payroll liabilities account with a $0.00 balance which is correct.
Posted @ Wednesday, February 20, 2013 4:23 PM by Matt Roberge
How do you process outsourced payroll in instances where the payroll company deducts 1 lump-sum from your account?
Posted @ Friday, March 28, 2014 8:17 AM by T Pen
T Pen, 
 
Pretty much the same way as described above. You need to work with them to understand gross pay, payroll liabilities, employer tax expenses and other deductions.
Posted @ Friday, March 28, 2014 9:39 AM by Matt Roberge
Yes, but how do I make it mirror the lump-sum debit on my statement? Thanks.
Posted @ Friday, March 28, 2014 9:44 AM by T Pena
T Pen, 
 
Sorry I can't state it any clearer than figuring out the breakdown between gross pay, payroll liabilities and payroll employer expenses. Your payroll company should be able to explain how they arrived at the amount deducted. If they can't change payroll companies.
Posted @ Friday, March 28, 2014 9:47 AM by Matt Roberge
Thank you for this article. What if the payroll company is handling our payroll taxes? They charge us a percentage each payroll that includes their payroll fee plus payroll taxes. Do I still categorize that into a payroll liability account or into a payroll expense account? Thank you so much!
Posted @ Friday, April 11, 2014 12:57 PM by KR
@KR your payroll fee should be coded as an expense.
Posted @ Friday, April 11, 2014 4:05 PM by Matt Roberge
we record our payroll in one je every. our manual checks are cut through qb and then reported through our payroll services. how do i record the je if it includes manual checks already
Posted @ Tuesday, July 15, 2014 8:51 PM by rosaliza
@kca1227 
You should enter the appropriate breakdown of gross pay, employee taxes and any other deductions on the manual check you cut through QB. The check does need to go through payroll for reporting purposes and your JE should only take into consideration the payroll taxes. Hope that helps.
Posted @ Wednesday, July 16, 2014 9:05 AM by Matt Roberge
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