Payroll accounting is a unique part of your bookkeeping and accounting operations. It focuses on calculating, recording, reconciling for benefits, deductions in regard to compensation, withholding taxes, and managing the entire payroll operation. The precise details of the job will depend on local, state, and even national rules depending on where your business and employees are located. When you outsource your bookkeeping that is only part of your accounting operations.
In addition to the fact that you are paying your employees for their work, payroll operations include their own costs. Costs are driven by legal requirements, the types and sum of compensation paid to employees, the efficiency of the payroll operation, and payroll staff salary and benefits. The sum of all expenses should be considered when you are thinking about how much you are paying out each year per employee. These costs also figure into whether you want to do payroll in house or outsource your payroll to a trusted company.
Accounting rules dictate that every accrued expense has to follow the matching principle. This means that expenses have to match the period when related revenues are reported. Please note that not all employee labor is considered an expense. For example, labor involved in manufacturing products is considered a cost of manufacturing and only becomes an expense when the product is sold out of inventory.
In payroll, performance obligations have to do with money retained and not paid directly to the employee. These monies include wage deduction and withholding from paychecks. Federal and State income tax withholding, FICA payments, Medicare, Social Security, State disability taxes, 401 K retentions for retirement, employee health insurance coverage, union dues, and court-ordered withholding such as for alimony payments.
When setting up small business payroll, there are exact steps that should be followed. State requirements will vary from state to state, Federal requirements may change from time to time, and you may have local requirements as well. First of all, you need to get an Employer Identification Number (EIN) which is used to track Federal payments.
The next part of the payroll accounting setup is setting salary levels, hourly and annual wage levels, and the time periods for when employees will receive their pay. One a week, every two weeks, or once a month are the usual. It is not advisable to go longer than monthly.
For insurance and 401 retirement plans, you need to set up the levels of employer contribution and how much employees will pay in to receive these benefits.
Various forms need to be filled in when an employee is hired. These include I-9 and W-4 forms to verify that the person may work within the USA and to determine how much withholding to take out of each check based on the number of dependents they claim. This is also the best time to have the employee fill out the information for direct payroll deposit payments.
There are several calculations that are done over and over again in payroll accounting. They include the following:
At the end of the month calculate indirect and direct compensation for all work. The sum will include salaries and overtime. This number will be used to determine withholding.
Next, add up commissions, bonuses, and other indirect payments.
Then, calculate deductions and withholding. This requires determination of the basis for each withholding before calculating employee wage and tax deduction amounts.
The calculation of provisions has to do with expenses that are accrued and liabilities and are paid in the future. Vacation pay and holidays often fall into this category.
When you do payroll you will calculate and register each accounting entry. Then employees are paid after withholding is taken out. One option for outsourcing your bookkeeping is to pass the payroll process to a trusted company after tallying up the hours. You or your payroll partner will also calculate back adjustments to provisions which involve adjustments because initially these are just estimates.
Doing payroll correctly starts with understanding how the business has it set up in regard to benefits, etc. The first thing is to make certain that all procedural and legal requirements are fulfilled for new employees. After that it is necessary to master the calculations for payments including the various deductions for Federal, State and Local taxes.
When these basics are in place, payroll accounting goes another step beyond basic bookkeeping and writing checks. When you outsource your payroll to a trusted company like Exigo Business Solutions you also get insights as to how efficient your system is, how to reduce costs, and where to make improvements.
For help with payroll accounting in your business, contact us today.
