What is Payroll Accounting? Here’s the Only Guide You Will Ever Need!
Employees are a necessity. In fact, without any employees, an organization is nothing more than a name. Employees are the heart of the organization and are often what keeps it going. This is perhaps why payroll accounting should be a top priority for managers.
This guide is a comprehensive resource that will equip you with all the knowledge you need about payroll accounting and more. It will guide you on the best practices, the right time to consider automation or software, and how to enhance the efficiency of the process. Let’s start with the definition;
What is Payroll Accounting?
We hear this term thrown around quite often, but has anyone ever stopped to really wonder? What does payroll accounting really mean? We all know that it is used to maintain a record for the organization of how much an employee is compensated, including the benefits, taxes, and any deductions. But is that all there is to it?
Let’s Understand Payroll First!
Payroll is how a business usually compensates an employee for a service they provide for a set period. This payroll is provided on a set date and is usually managed either by accounting or human resource departments within the company. However, for smaller businesses, this might not be that structured.
Many firms today, especially bigger ones that can afford it, are slowly transitioning to specialized firms or applications that can handle their payroll processing, deal with the provision of benefits and other complicated additions such as insurance and related accounting tasks. This allows firms to take the burden off their back while providing employees with convenience and quicker salaries.
Why Does Accounting for Payroll Matter?
Payroll accounting goes deep, often determining whether your business is allocating resources efficiently to the people making the most money for the business. Retaining employees has gotten more difficult over time. According to the U.S. Bureau of Labor Statistics, 4.15 million people quit their jobs in August 2022. Searching for and recruiting the right resources can be costly, so it is important to make existing employees feel valued.
Payroll accounting records are usually placed in financial journal entries to provide a comprehensive overview of the organization’s payroll expenses and necessary details regarding each transaction, such as when the employee was paid, by how much, and through what mode of payment.
What Does Payroll Accounting Include?
Here are some of the essential details you simply can’t miss out on;
– Employee compensation (this includes not just the salary but also all the monetary benefits received).
– Benefits that are yet to be paid, such as health insurance or 401(k) plans.
– Tax withholdings for both the employee and the employer, such as Medicare or unemployment.
– Any other benefits or costs incurred by the employer on such benefits.
The Technicalities of Payroll
Payroll accounting can get complicated quickly. When setting a payroll in the United States or even hiring a resource, it is essential to be well aware of all the regulatory and compliance requirements.
It is wise to keep in mind that if you are a business with annual gross sales of $500,000 or more, you are subject to the Fair Labor Standards Act (FLSA). This was an act set up to protect labor from getting exploited. With the FLSA comes various regulations you must follow, including but not limited to;
– Minimum wage
– Overtime pay requirements
– Limitations on child labor
– Restrictions on times when workers are considered on the clock
According to the FLSA, any hour worked in excess of the 40-hour-per-week margin needs to be compensated for at 1.5 times the regular rate. However, it is important to remember that this does not apply to all employees or businesses, which is why you may need a professional to guide you through the process.
Types of Payroll Accounting Entries
Accurate financial recording is quite helpful for all parts of the business. Similarly, payroll accounting can also benefit from it. Before paying your employees and making necessary allocations for taxes, make sure your accountant goes over and records all necessary financial transactions. Here are the entries you need to ensure;
1. Initial Recording Entries: This is really only a basic entry of the employees’ salaries and taxes. However, it is a standard method that is not only tried and tested but also extremely easy to master.
2. Accrued Wages: This type of payroll recording is usually done at the end of an accounting period. Depending on the size of your business and what your stakeholders prefer, this can be the end of the quarter or the year.
3. Manual Payments: Often, businesses consider skipping the automation entirely and sending ahead a manual payment through a check. Once you mail the check to the address and it gets cashed, the accountant can just make the necessary changes to reflect it on the company’s records.
Payroll Liabilities vs Payroll Expenses
We have all heard of liabilities before, but did you know that they also exist with payroll? It is important to ensure that you know these terminologies well once you are setting out to invest in a new venture. Often, using both these terminologies interchangeably can lead to a long of confusion and errors.
Payroll liabilities would include all the costs associated with hiring and employing your workers, whereas payroll expenses include any costs associated with managing payroll accounting and any other related activities.
So, the salaries you pay to your employees, as well as the taxes you need to pay to the government on those salaries, would be payroll liabilities, while investing in payroll software could be a great example of a payroll expense!
How to Begin Payroll Accounting?
Accounting for payroll doesn’t need to be difficult, and it doesn’t take a lot of time either if you have a plan set out. Here are all the steps you need to accomplish;
Step 1: Start by outlining all the main components of your payroll
When you set up a business, you must outline all the ways you will be compensating your employees and any benefits you may give them that would be an added bonus. You may need to determine the wages according to an employee’s experience or in relation to how your competition may be paying them.
You might also need to consider how you want to pay your employees. This depends entirely on the nature of their work and can differ from one job to another. Part-time workers may need to be paid hourly, whereas full-time workers would need to be paid once a month. Also, consider whether you can afford benefits. This includes health insurance and 401(k)s, as well as many others that your competition may be providing.
Step 2: Get the paperwork in order
When hiring, ensure you have all the paperwork in order and compile all the forms you will need during the onboarding process. All employees must fill out an I-9 form before working for an organization, and they must submit correct forms of identification as listed by the federal government, such as their driver’s license, Social Security Card, and birth certificate.
Employees are also required to bring along their W-4 form, as it allows the employer to determine their tax status. This is essential for you when you file company taxes as it shows you how much the government can take out of the paycheck.
Step 3: Accounting for payroll
This is where the magic happens; where all entries come together and accumulate into massive data. Fortunately, it can be done quite easily through a centralized software system. This can save you time and effort, as well as automate much of the payroll accounting processes for you.
Step 4: The chart of accounts
Setting up a chart of accounts setup list is necessary if you want to document the organization’s financial transactions. This is where you will be accounting for your business’s expenses and liabilities, depending on how you conduct your payroll. It can also help during tax season when you have to pay taxes on behalf of the company.
Step 5: Tax season
The tax season is perhaps the most daunting out there. However, filing taxes shouldn’t be that hard as long as you have your payroll in order. All you need to do is find out the net pay of your employees, which can be accomplished by subtracting all the payroll deductions from gross pay. This way, the government can figure out how much employees can receive per paycheck.
Master That Payroll Accounting Today!
Although payroll accounting isn’t difficult, it can be a hassle, especially when you are trying to do it all alone. If you don’t want to get caught up in the daily checks and balances, consider easing your burden and handing it over to financial experts.
Monily, a subsidiary of Arthur Lawrence, houses some of the best experts in the industry to automate your payroll and eliminate hassle. Monily’s experts are well-equipped to service multiple niches, ensuring the payroll matches the industry and the employees.