There are a couple of ways to do payroll for a business. Some business owners will opt for a third party payroll service such as Gusto or Paychex. Other business owners will use a QBO payroll service. There is a method from Intuit for full service payroll or a subscription that allows for a more hands on experience.
Typically, there are three payments that are paid out from your company bank account when payroll is run. They are:
Payroll taxes (Federal withholding, federal state, federal unemployment tax “as applicable”, state withholding, and state unemployment tax)
A common mistake made is when the net pay is accounted to a payroll expense and the total tax liability may be posted as a payroll tax expense. DON’T DO THIS.
Here’s why the common mistake is problematic. Payroll cost should not be posted JUST as an expense. Each payroll check consists of Gross pay less taxes. Sometimes there are other deductions but for the purpose of this discussion we will only consider wages, payroll liability, and payroll fees. Payroll liability taxes are for the most part a liability except for the employer contribution which is an actual contribution to taxes that the employer pays to the taxing entity, thus an expense to the employer. The other liability is collected from the employee’s wages and later paid out to the tax entity along with the employer contribution on behalf of the employee. Payroll fees are booked to the expense account.
A paycheck includes: Gross Pay - Withholding - Other Deductions to = Net Pay
Withholding refers to Taxes which includes: Federal W/H, SSI, FUI, State W/H, SUI, all of which the employee pays and employer taxes that the employer contributes.
Do you want your financial reports to reflect this accounting correctly? Booking costs to the correct liability and expense account is the only way to produce good financials and to see an accurate big picture of how the company is doing in this respect.
Here's a simple excel sheet to use as a template for payroll (click here). It’s very basic but is intended to use to see the bigger picture or to use as a check and balance if you have to cut an individual check real quick and want an extra method to verify accuracy.
Got questions? Comment below or schedule a 30-minute free consultation or a full session at https://calendly.com/theresa-59.