Payroll can be a very tricky business, and of course, that means it is easy for us to overcomplicate things (and many do). So many small businesses turn to a payroll service that is integrated with QuickBooks because there isn’t much to do bookkeeping wise. This makes a strong case for using one of these services, but as with everything, there is a downside. With a payroll service, it is impossible to edit a paycheck, and the need to edit paychecks comes up often.
I’ve seen this happen first-hand a lot.
In fact, just last week I was coaching a bookkeeper whose client had a problem with payroll.
This client’s checks were being issued for the wrong amounts. The payroll company said not to send out the paychecks, but the company got the memo too late. So employees ended up getting paid twice with the wrong amounts. One paycheck was subject to taxes and the other wasn’t as the payroll company reversed the payroll on their end.
The net pay for the checks that weren’t supposed to be issued now have to be treated as an advance and that advance recouped on the next payroll.
This is a total mess, obviously.
When you are manually entering payroll in QuickBooks, it is much easier to manipulate the entries to achieve the right outcome and presentation on the financial statements because the entries are like any other check, which can be edited. (The template in my video can be found here.)
If you use an outside service, then there are two ways to manually enter payroll in QuickBooks. It depends on how much detail you want for your payroll in QuickBooks, and that depends on what kind of reporting you want to be able to get. Before we get into the two methods, we need to understand the basics, especially where any inexperienced bookkeeper will most likely enter payroll incorrectly.
Let’s assume that everyone is on direct deposit. Your payroll service will take out three payments with each payroll:
Many bookkeepers make the mistake of simply bookkeeping the net pay to payroll expense. Then they book the taxes to the employer tax expense, and the fees get booked to payroll fees.
The only entry that is correct is the one for the fees.
Here’s what they should be:
Net pay: Net pay is comprised of the gross pay, which is the true expense to the company, less the withholding. The withholding amounts belong to the government. So they are deducted from the employee’s paycheck and placed in a liability account. That liability is cleared out when the tax payment is made.
Taxes: The tax payment is made up of two parts, which means the transaction needs to be split. Part of the payroll tax payment is the withholding that came from the employees’ paychecks. The other part is the employer’s share of the taxes. Most of the employer’s taxes come from matching Social Security and Medicare tax.
The payment of the withholding is what zeros out with the payroll liabilities. The employer’s share of the taxes is an expense that goes on the income statement, along with the gross payroll expense. They each go on separate lines.
Fees: The fees simply get booked to a payroll fees expense account.
Officer’s salaries: The other thing that is worth noting here is that if your company is an S Corp, then you need to break out the officer’s salaries on a separate line on the income statement.
As long as you understand the above first, then this next part should be fairly easy to follow.
Most companies will want to book the payroll as a summary. In other words, you would book each of the three transactions described above as a lump sum.
The gross pay would be the total gross pay for all employees. Same for the withholding. Then the net pay comes out and matches exactly what comes out of the bank account.
For payroll in QuickBooks, you record a check for this and everything reconciles just fine.
The tax payment is split based on the total withholding for all employees, and the total employer match. Again you write a check in QuickBooks with the split between the payroll liabilities and employer taxes, and everything should reconcile.
This method is for reporting junkies like me who want it all. I want each paycheck recorded separately, with each employee as a payee. The other situation, when you need this, is if your payroll company doesn’t pull the funds out of your bank, as I described above. I’ve seen two services that take out the funds in a strange way.
In the detailed method, you record each individual paycheck in the exact manner described above. Instead of recording them as checks in your bank account, you will set up a new bank account in QuickBooks. Call it “Payroll Clearing.”
When you record the paychecks in the Payroll Clearing account, you still book the gross pay and the withholding. The balance in the Payroll Clearing account will be negative. When all of the paychecks are in, that negative amount should be exactly equal to the amount of the net pay that comes out of the bank account. When that transaction is posted in the bank account, book it to the Payroll Clearing. That will zero out the payroll clearing.
Book the taxes and fees the same way as above.
The video above demonstrates how all of this works. My sample report is can be found here.
Payroll is normally the biggest expense that a company has. This makes it that much more important that it gets booked correctly, yet most companies have it wrong.
Not sure if your books are correct? Check your payroll entries in QuickBooks. Even if you don’t understand the accounting, the giveaway is that the payroll checks should be split between gross pay and liabilities. If you see the split, it means that your bookkeeper probably knows what they’re doing.