How to do payroll in 9 steps

The outlook for accounting careers often reacts to the health of the economy. New businesses and growth within existing organizations creates a greater demand for payroll accountants. The Bureau of Labor Statistics (BLS) projects 6% growth for accountant and auditor occupations between 2021 and 2031, plus over 136,000 annual openings. Operational accountants help organizations refine their operations and reduce costs. They may oversee all budgets and costs, or specialize in areas like supply chain or payroll. These specialists analyze spending, financial reports, budget efficiency, and performances to determine if and how the organization can improve its financial health.

Journal 1 shows the employee’s gross wages ($1,200 for the week). After subtracting some of the most common payroll taxes, the employee’s wages payable or “take-home” pay is $925. The accounting process often includes payroll, along with the preparation and analysis of other financial accounts. Payroll focuses on tracking and issuing employee wages and taxes. Precise payroll accounting involves calculating wages, deductions, commissions, bonuses, and taxes. Professionals may need to reconcile or audit payroll accounts and investigate and report irregularities.

Every employee will need to have certain tax forms, like tax filing status and any other needed personal information. On top of personal information, you’ll also need employee banking information, such as the bank name, sort code, account number, and the SWIFT or IBAN. All of these details should coincide with the payroll policy you put into place for your business.

  • If your business is ever audited, you need records of your taxes and employee compensation.
  • They manage spending and budgets or specialize in specific areas, such as payroll management.
  • You have to calculate the amount of taxes withheld from your employee’s gross pay.
  • This includes employee wages and employer’s Social Security taxes.
  • A small business is one that can use out-of-the-box software without requiring extensive customizations.

Determine the benefits that you will offer employees, such as health insurance, pension plans, child care benefits and paid leave. Having premium benefits will motivate employees to improve their performance and productivity. The first step is to make decisions regarding employee compensation. The allotted compensation can significantly impact employee retention and your business’ cash flow.

Payroll Technical Architect

To help you master this topic and earn your certificate, you will also receive lifetime access to our premium payroll accounting materials. These include our flashcards, cheat sheet, quick tests, quick test with coaching, and more. Throughout her career, Heather has worked to help hundreds of small business owners in managing many aspects of their business, from bookkeeping to accounting to HR. Before joining Fit Small Business, Heather was the Payroll/HRS Manager for a top cloud accounting firm in the industry. Her experience has allowed her to learn first hand what the payroll needs are for small business owners. When you or your bookkeeper goes to close the books for November, $700 will need to be recorded as a credit to be paid in your accrued payroll account.

Use IRS tax tables to determine the amount of taxes to be withheld from employee gross pay. Eventually, you need to pay employer taxes and remit withheld taxes. When you record payroll, you generally debit Gross Wage Expense and credit all of the liability accounts.

  • Whether you run payroll in-house or outsource to a payroll service, be sure to closely integrate your payroll operations with your accounting software.
  • Professionals often work full time with more focused duties in larger organizations.
  • But before you can do that, understand the basics of using debits and credits in accounting.
  • Many payroll fintech firms, such as Atomic, Bitwage, Finch, Pinwheel, and Wagestream, are leveraging technology to simplify payroll processes.
  • Ultimately, any software you use needs to complete accurate calculations, understand tax guidelines, and increase efficiency within your company.

The last step is reconciliation; an additional review to ensure the ledger reflects the payroll transactions accurately. The penultimate step is to post journal entries in the general ledger. Once this has been actioned, in many cases you won’t be able to reverse it, so you need to ensure your data is accurate. As mentioned above, 25% of small companies still perform manual accounting and bookkeeping. This comes with some potential drawbacks that can compromise your business finances. It’s key to motivating your workforce, boosting productivity, and achieving success.

The Basics of Payroll Accounting: How to Record Payroll Entries in Your Books

Many payroll fintech firms, such as Atomic, Bitwage, Finch, Pinwheel, and Wagestream, are leveraging technology to simplify payroll processes. With QuickBooks Payroll, this will automatically be handled whenever you create an invoice or pay a bill. However, if you make any manual payments, you need to record these yourself.

The next step is to calculate all the payroll payments within your organization. If you’re doing this manually, you’ll need to determine the gross pay of each employee for the pay period in question first. For hourly employees, all you need to do is multiply the number of hours worked and the employee’s hourly rate. This goes back to journals 2 and 3 where you’re recording all taxes you’ve paid. These include taxes the employee is paying via their withholdings each pay period, as well as taxes the business owes.

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Problem #1: Not keeping payroll records for at least 3 years

A good way to avoid the risk of missing these tax remittances is to outsource payroll to a third-party payroll processing service, which remits the funds on behalf of the business. Legislatively, federal and state wage-and-hour laws require that you pay your employees accurately and on time. Moreover, you must report wages paid, taxes withheld and your own share of taxes to the federal and state taxation agencies.

Other companies choose to outsource their payroll functions or to invest in an integrated ERP system that manages the overall accounting and payroll. Their company pays employees every two weeks for a total of 26 pay periods. Payroll costs are related to obligations (expenses) assumed by an employer. They fund compensation paid to employees for their direct labor or as a consequence of mandatory benefits defined by legal requirements. Say you wanted to see how much you spent on employee payroll last year, as opposed to the year before. All the wages you’d be looking at are payroll expenses (i.e., wages that you have already paid).

COS Payroll Specialist

Payroll clerks are entry-level accounting clerks who record all payroll data and perform the necessary calculations. They ensure the accuracy of all recorded information and prepare paychecks for the staff. In large organizations, payroll clerks may report to accounting or financial managers.

Coordinator, Payroll Temp

After you pay the wages, reverse the entries in your ledger to account for the payment. As you do your payroll accounting, record debits and credits in the ledger. Whether you debit or credit a payroll entry depends on the type of transaction made. The debits and credits in your books should always equal each other.

By contrast, some employers may have additional accounts to add, like a fitness credit or education reimbursement. The educational requirements for payroll accountants vary by organization and role, but most professionals need a bachelor’s in accounting at minimum. Most business owners choose to hire candidates with a Bachelor’s in accounting or a related field since this role is critical to your company’s well-being. Or if you’d rather, you can work with a payroll company instead of an individual CPA. Hiring a professional accountant or an outsourced payroll service is the easiest solution, but often the most costly. You will delegate most—if not all—of the payroll responsibilities to an accounting professional.

Like financial accounting, payroll accounting involves recording and categorizing company transactions, but it focuses exclusively on employee-related expenses. Unlike managerial accounting, payroll accounting requires no complex analysis on which to base business decisions. Credit the FICA tax payable, federal income withholding payable, state income withholding payable, and any other withholdings on employee paychecks. Payroll liabilities relate to expenses a business owes but hasn’t yet paid. This includes employee wages and employer’s Social Security taxes.

When you switch accounting periods, make additional journal entries to reduce the cash account and eliminate the liability account balance. Decrease the liability account by debiting the payable entries in your history and purpose of the amendment books. The primary purpose of payroll accounting is to document expenses related to all compensation types. This means it can calculate pay based on hours logged by employees and make the necessary deductions.