The Basics of Payroll Accounting
If you own a business and pay yourself or someone else, payroll accounting is involved.
What is payroll accounting? Payroll accounting is the recording of employee compensation.
Employee compensation includes:
- Hourly employees
- Overtime pay
Payroll accounting not only includes income earned by employees but also taxes withheld.
Some common payroll taxes are:
- Federal withholding taxes
- State withholding taxes (if applicable)
- Social security taxes
- Medicare taxes
Other elements that involve payroll accounting are health insurance, retirement accounts, and wage garnishments.
Some of these items may look familiar to you. Many of them are clearly reflected on your paycheck.
However, they are all not accounted for the same way. Some items represent liabilities and others are expenses.
Let’s take a deeper look into payroll accounting and how it should be recorded.
Salary & Wage Types
Before you hire anyone, you will need to first decide their salary and wage type. How much are you going to pay them? Will they be an hourly or salary employee?
Next, you’ll need to figure out how often you will pay your employees. Common pay periods are monthly, bi-weekly, semi-monthly and weekly.
Establish what fringe benefits you will offer your employees. Fringe benefits are considered a form of payment for work performed. As an employer, you will have to make contributions towards these benefits, as well as your employees. You will have to decide how much you will contribute towards 401k plans or health insurance coverage.
You’re now ready to hire your first employee. When you do, you will have to collect certain information from them regarding how you should withhold money from their check. This information can be gathered by having them fill out a Form W-4.
The completion of Form W-4 is the starting point for payroll accounting. For a newly hired employee, it is one of the first forms he or she completes.
Form W-4 is intended to tell you how much of your employee’s income should be withheld from their paycheck and remitted to the IRS. Completing this form correctly is the sole responsibility of the employee. Your responsibility is to withhold the correct amount and send the funds to the appropriate agency.
Form I-9 is a requirement for all employers. It is a form that verifies the citizenship and/or right to work in the United States for each of your employees.
Section 1 of Form I-9 is completed by the employee. They provide general demographic information, like name and address. They also have to specify their eligibility to work in the U.S. Options include a U.S. citizen or an alien authorized to work.
Section 2 of Form I-9, is completed by you, the employer. Here is where you specify the acceptable documents provided by the employee. Examples include a passport, permanent resident card, driver’s license and birth certificate.
Direct Deposit Form
If you decide to pay your employees electronically, they will have to complete a direct deposit authorization form. The form includes a section for the employee’s bank account information and a signature line authorizing this method of payment.
Paying your employees via direct deposit is cheaper and faster than writing checks. You save money by not having to order checks. You save time because you don’t have to physically write checks. The payroll process becomes more automated when done through direct deposit.
Now, you understand all of the information you need to pay employees. Let’s take a deeper look into the details of payroll accounting.
Payroll accounting mostly involves recording expenses, liabilities, and cash.
Some common expenses are:
- Payroll taxes
- Fringe benefits
Payroll expenses can also be a liability to your company depending on when your payroll period ends and when you pay you actually pay your employees. For example, if your pay period is December 17th through December 31st, but you pay your team on January 7th, a wage expense has incurred in December and a liability since it has not be paid yet.
Fringe benefits are an expense to your company. Most of them are tax-deductible, such as health insurance and educational assistance.
The IRS does put limits on certain fringe benefits, so make sure to check out those guidelines on the IRS website.
There are taxes associated with payroll accounting. Employees pay a certain of amount taxes based on how they completed their W-4. As the employer, you also have to pay taxes.
Based on the Federal Insurance Contributions Act, you and your employee have to pay a 7.65% tax. Also known as FICA, this is a mandatory tax expense for the employee and employer that is used to fund social security and Medicare in the U.S. It is based on the gross wages earned by the employee.
More specifically, 6.2% goes towards social security and 1.45% goes towards Medicare. Combined, 7.65% in FICA taxes.
Not to be confused with FICA, FUTA taxes are paid only by the employer. Used towards funding Federal Unemployment, FUTA is a tax based on the first $7,000 of wages you pay each employee.
State withholding taxes (if imposed) are based on W-4 information for the employee but there is also an employer portion too.
SUTA taxes represent state unemployment taxes. SUTA is only paid by the employer on behalf of each employee. SUTA is an unemployment insurance. Funds collected are used for individuals who are laid off from their jobs.
How to Pay Your Payroll Taxes?
Once you have withheld the proper amount of Federal, FICA and Medicare taxes, you will need to calculate your portion in FICA, Medicare and SUTA taxes.
Then, pay these amounts to the appropriate agencies, either monthly or semi-weekly, depending on the size of your company.
You report your payroll taxes on Form 941 quarterly. For FUTA taxes, you report these amounts on Form 940 annually.
There is numerous payroll software out there that can make the process of recording, filing, and paying employees’ wages and taxes more efficient.
Payroll systems today have the capability of tracking hourly employees, calculating wages and taxes. Payroll systems can remove the human error associated with manually completing payroll.
When it’s time to file payroll tax forms, like the 941, most of the information can be auto-filled based on previous payroll runs.
Typically, streamlining your payroll accounting comes in 1 of 2 options. Either do it yourself, using the software of your choice or outsourcing the process completely. It is cheaper to do payroll accounting yourself but there is a greater peace of mind knowing an expert is handling it for you. You are least likely to have errors and you can rely on their expertise in planning to offer fringe benefits, changing from hourly to salaried employees or help with special situations.
Who will manage your payroll accounting needs?
LYFE Accounting can help you with your payroll accounting. Whether you hired your first employee or have 100 employees, we are here to serve you with all of your accounting needs. Contact us today!