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?)
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.
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.
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 a 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.