This is the best (and the ONLY best) way to enter payroll into an accounting system: Enter debits for the expenses and credits for the liabilities. Use a general journal dated on the last day of the payroll period. Let me illustrate:
|Officer’s Salary (Corps)||$50,000.00|
|Payroll Expense (everyone else)||$40,000.00|
|Payroll Taxes (employer only- includes only the employer share of federal and state payroll taxes)
|Payroll Fees||$ 40.00|
|401(K) Payable (amount withheld from paychecks)||$ 6,000.00|
All of these items are readily available on the payroll reports received from the payroll service.
When the payroll checks are recorded, or ACH debits hit the bank account from the payroll service, the checks and debits are coded to “Payroll liabilities.” The balance in the payroll liabilities account will always come back to zero if all the entries are recorded correctly. In the situation above, the actual paychecks might be $78,500.00, the tax checks $13,240.00, along with the $40 fee. All the liabilities will clear when the checks are entered in QuickBooks. Enter all the payroll checks as debits to payroll liabilities right off the payroll register, as well as the debits for taxes and payroll fees.
The most common mistake occurs when the bookkeeper records the “net” paychecks as wages expense, and the debits for payroll taxes as “payroll tax expense.” The actual wages expenses is the gross pay before withholding, so wages expense would be significantly understated by using this method. Payroll tax expense would be significantly overstated, since it would include both the employee and employer portion, instead of just the employer portion.
Reconcile your liability accounts regularly and investigate any instance when the balance is not zero.
In the case of a Subchapter S corp, healthcare premiums for the owners and included in the Officer’s Salary and should be coded that way on the books and called in to the payroll service. They are deductible to the Corporation, income to the owner, and then deductible on the owner’s individual return.