All employees of an organization receive payments through the payroll department. The process of documenting records for employee compensation is known as payroll accounting. Payroll accountants have an influential role in making sure records are filed correctly, so employees can receive proper earnings for completed work and that financial operations are being carried out smoothly.
In this article, we will outline what payroll accounting is, what's included in payroll accounting, examples of this concept and how to start payroll accounting.
What is payroll accounting?
Payroll accounting consists of filing and tracking employee compensation data like money withheld from each paycheck and taxes and benefits the employee receives. Payroll accountants use financial journal entries to summarize an organization's transactions and total cash flow. Payroll entries fall under the scope of a general ledger that sorts all financial information. Once all payroll information is documented on an employee, human resources can pull this data and send it to their manager to add it to their performance evaluation.
What is included in payroll accounting?
Payroll accountants need to employ their hard skills to accurately insert relevant information into the ledger. All expenses, liabilities and assets must be recorded for financial and compliance purposes. Here is a full list of what you should add when documenting employee compensation:
- Gross wages, salaries, bonuses and commissions
- Withholding employer and employee taxes
- Withholding of salary, insurance premiums and savings plans
- Employer fringe benefits' expenses
Gross wages, salaries, bonuses and commissions
You should account for all earnings that an employee made during the fiscal year. This includes the annual salary, additional wages and overtime pay if applicable. If your employer offers overtime pay, check with your manager and human resources to ensure it's been approved for a particular employee. You should also confirm which employees received a commission on deals they closed for the organization.
Withholding employer and employee taxes
Tax figures that are withheld from an employees' salary must be recorded separately. An employee can determine how much they want to withhold when they fill out their W-4 form on the first day of employment.
Some examples of taxes withheld from an employee's paycheck and cost employers include:
- Federal income taxes
- Social security taxes
- Medicare taxes
- State income taxes (if necessary)
Withholding of salary, insurance premiums and savings plans
Depending on the benefits an employer offers, they'll withhold an employee's part of healthcare premiums, savings plans for retirement or contributions to nonprofit organizations. This way, you can segment how pieces of the employees' salaries are withheld other than tax purposes.
Employer fringe benefits' expenses
Payroll accountants must include the cost of an employer to administer health and dental benefits, give paid holidays, retirement and worker's compensation if needed. All the information gathered here can help you budget and find out if you can expand the benefits offered to employees.
Related: Hard Skills vs. Soft Skills
Examples of payroll accounting
You can conduct entries in three separate ways to ensure payroll is correctly recorded:
- Initial recordings: Recordings are the standard method of entering payroll data. This only applies to employees' wages, taxes and withholdings, not the company's.
- Accrued wages: This entry happens at the end of a company's accounting period. This can either be quarterly or annually, but it'll depend on the size of the company and the amount of urgency external stakeholders have to review financial information.
- Manual payments: The instance of inserting a manual payment happens when you need to send a check to an employee directly to their home address. If you adjust an employee's pay, then issuing a check may be warranted to account for the change.
How to initiate payroll accounting
If you need assistance for beginning to track payroll, take a look at these steps to help you get started.
- Sort primary items for payroll accounting
- Determine employee paperwork
- Calculate the sum of payments
- Document payroll per expense
- File taxes
1. Sort primary items for payroll accounting
When you start a business, you'll need to make clear decisions on how you'll compensate your employees. The types of compensation you offer can determine the longevity of an employee, and the amount of effort required to perform tasks and projects assigned by their manager.
Let's break down what preliminary choices you'll have to make:
First, you'll need to register your business with the Internal Revenue Service to receive a Federal Employer Identification Number. Once completed, decide how much you want to pay your employees. You should compensate employees based on how much competitors within your industry are paying them. Conduct a SWOT analysis to help you identify competitors' pay and see if the salary you offer is a strength for your business. How you pay in wages is pertinent to how you document payroll information.
Periods of payment
Consider if you want your employees to work hourly or annually. Part-time employees tend to be paid hourly, so consider how many employees you'll need and the number of hours working at your company. Also, determine if you want to pay employees' once a month or a week. It's common for employees to pay employees semimonthly or biweekly as well.
Understand the bandwidth you have when it comes to the benefits you can offer. Get insights from industry experts on what compensation your competition offers. This way, it's comparable to the market you work in. Health insurance and 401(k) plans are some of the most popular benefits offered, but you must have an idea for how much you'll provide to fund this plan, and how much the employee takes out of their paycheck.
2. Gather employee paperwork
Once you have payroll processes down, you can compile all the forms you need employees to complete when you onboard them. This way, the information they fill out gets inserted directly into the payroll system.
Employees need to fill out the following forms for payroll accounting purposes:
- I-9 form: Every U.S. citizen must fill out this paperwork before they work for an organization, and they have to bring the correct forms of documentation required by the federal government, including a driver's license, Social Security card and a birth certificate.
- W-4 form: The W-4 determines the employee's tax status, and if they decide to take out extra allowances for their dependents. This information is vital for when you file taxes and shows how much can be taken out of their paycheck by the government.
- Direct deposit authorization form: An employee fills out this form if they want their check deposited into their bank account. Direct deposit is a better option for the payroll accountant who's seeking to avoid manual payments when filing employee information.
3. Calculate the sum of payments
A centralized software system is an indispensable way for you to file payroll information. This saves you a lot of time in all steps of the process such as submitting necessary payments and forms electronically, and it can send you reminders about upcoming deadlines on notable tasks.
4. Document payroll per expense
Implement a Charts of Account Setup list to set up the documentation of the organization's financial transactions. Here, you can directly account for your expenses and liabilities using what's included above, and you can depict expenses by subtracting the amount withheld or eligible for taxation.
5. File taxes
Find out the net pay of your employees by subtracting all deductions from the gross pay. The sum of that figure gives the employee and the government a final number of how much they'll receive per paycheck Also, retain all documents required by local, state and federal law in the case of an audit.