Look at the skeleton of the QuickBooks program and it's made of 5 basic functions. All of
them are on the home screen that split off into an abundance of specialized categories. It consists of Vendors, Customers, Company, Banking and lastly Employees. The Employee section of QuickBooks is predominately utilized when the payroll function has been activated which I will adamantly advise against. Some functions of the payroll section are available however even if you do not activate it, namely the employee names list. Before we begin talking about how to enter payroll let us briefly discuss the difference between bringing payroll in house (utilizing the QuickBooks payroll function) and using an outsourced vendor such as ADP or Infnisource.
Outsourced Payroll - Most clients that I work with (and will advise if not) utilize an outsourced payroll company. By using an outsourced payroll company the liability of paying the various federal and state agencies the correct amounts in regards to unemployment along with state and federal taxes has now been lifted from you. Not to mention the time and frustration that you've relinquished by utilizing a streamlined system. This alone should be reason enough to sway you from keeping your payroll in house I hope.
Recording Expenses - Now that your payroll has hopefully been outsourced what's the best way for you to properly recorded the associated expenses and liabilities? We'll take a single paycheck made out to Homer at the Springfield Nuclear Power Plant managed by Springfield Payroll. The breakdown for the payroll is as follows...
Employee (EE) - $1000 In Gross Wages earned plus a $100 Advance with $100 in EE Federal Taxes & $50 in EE State Taxes
Employer (ER) - $100 in ER Taxes - $50 Payroll Fee to the Springfield Nuclear Power Plant
This gives Homer a net paycheck of $950, The Springfield Nuclear Power Plant paying $250 in
total taxes, and a $50 payroll. Typically these three (Wages, Taxes, and the Fee) are withdrawn from your checking account in three separate transactions.
- Entering Wages - The first check is made out to Homer Simpson the Employee. His total paycheck is $950. The breakdown for this paycheck would be $1,000 Gross Wages (Expense) $100 Payroll Advance (Other Asset) and -$250 deducted for employee taxes (Payroll Liability). This gives Homer now a net paycheck of $950
- Entering Taxes - The tax check is then made out to the payroll company Springfield Payroll. The total check will be for $350 broken down with $100 in ER taxes (Expense) and $250 in EE taxes going against the liability account bringing it back to $0. I would even advise as much to reconcile the liability account every payroll to ensure this nets to $0
- Entering Fees - The fee is the easiest as all you need to do is write a check to the vendor (Springfield Payroll) for the amount charged. In this case, $50 would be a Payroll Fee (Expense)
- Since Homer has taken an advance on this paycheck you would record the $100 to Employee Advance (Other Current Asset) showing that you are currently due these funds from Homer. On his next paycheck a negative amount of $100 would then be deducted from his paycheck which will bring the Employee Advance account to $0
- Reimbursements can be realized as an expense to the company adding to the employees' paycheck
- Garnishment checks paid out on behalf of the employee to the state prior to the paycheck (child support, student loan debt, back paid taxes) can be realized just like an advance to the employee where the next paycheck the total amount would be deducted and thus bringing back to the Employee Advance account to $0
- Separate the owner salaries paid out to a different expense account to help with year end reporting, your CPA will thank you
- If an employee besides yourself is able to view the profile restrict their access from viewing employee checks
- If you have a lot of manual checks cut per month look into a payroll import provided by your payroll company, the initial costs to have this setup is a huge time saver
Well that's a bit of bookkeeping payroll in a nutshell. The biggest take away from this article is to just keep payroll as simple as possible. It can be an extremely complex chain of events and some people choose to be a masochist when it comes to their payroll. But, by outsourcing your payroll and keeping it to as few accounts as possible everything will be done in no time for your small business. If some (or all) of this didn't make sense you should also visit the video on how to properly record outsourced payroll, adios.