Understanding how payroll accounting functions for small business owners can take time. You can make it happen as long as you have patience and are willing to learn. On payday, January 5, the checks will be distributed to the hourly-paid employees.
Recall our previous example of employees getting paid on January 17, from work they did January 2-15. On January 17, once employee wages are fully paid, those liabilities become expenses. When it comes time to pay the payroll payable such as FICA and Federal Income Tax Payable, you would simply debit the payable accounts you are paying and credit cash. Small business accounting payroll involves both expense and liability accounts. This article will show you examples of small business accounting payroll entries.
Is Payroll an Asset or Liability?
Small businesses rarely record this liability in their books. But business owners should keep in mind how many hours they’ll payroll accounting examples need to pay out in the future. Essentially, payroll-related accounts include a mixture of expenses and liabilities.
- The primary payroll journal entry is for the initial recordation of a payroll.
- Payroll accounting helps you determine whether to hire contractors, full-time employees, or part-timers.
- Again the control accounts should net to zero after the payments have been made, and any difference needs to be investigated before completing that periods payroll process.
- That way, you can look back and see details about employee compensation, such as when you paid it, how much it was, and where the money went.
A payroll journal entry includes employee wages, direct labor expenses, FICA expenses, payroll taxes, and holiday, vacation and sick days in the Debit section. Other items may be specialized payroll options, such as a 401k plan. The Credit section includes FICA taxes, state withholding taxes, federal withholding taxes, social security taxes, and Medicare taxes. Other items may be federal unemployment taxes and state unemployment taxes.
Main Costs of Payroll Accounting
Multiply the number of hours worked by the pay rate for each employee, also factoring in any overtime or shift differentials. This step may be addressed automatically by your payroll software. Salaried employees require no change in wages paid for each payroll, but you must collect and summarize information about the hours worked by non-exempt employees. This may involve having employees scan a badge through a computerized time clock, or enter it through an online form. Have new employees fill out payroll-specific information as part of the hiring process, such as the W-4 form and medical insurance forms that may require payroll deductions.
Payroll is a liability, as are all expenses related to it like wages payable, salaries payable, or accrued wages payable. If that’s not the case, you need to double-check the totals and locate the accounting mistakes. Keep in mind that your debits (left side) should equal your credits (right side).
What Is the Main Purpose of Payroll Accounting?
Modern payroll services provide companies and employees with a cloud-based portal where they can set up and view their benefits and salaries. Recording a payroll journal entry can either be done manually or through the use of accounting software. Either can get you the same results, but using accounting software is, by and large, the easier, more efficient way of getting there. This item is any money paid by the employer or organization to the government as taxes every year.