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Recording payroll transactions manually

Answer ID: 1819

If you manually calculate payroll or use a Third Party service, such as Paychex or a personal accountant, Journal Entries are a good way to record the accounting information from these transactions. You would use the information on the payroll summary report, which is furnished by the payroll company, to create the journal entry.

Below is an example of how to record a payroll journal entry transaction.

Fred's Residential Remodeling Company has five employees that they run payroll through Paychex for. In the case of a journal entry we would take the gross pay for the employees, for example $4055.00.

  1. Go to the Banking menu and select Make Journal Entry or click on the + icon at the top center and under Other select Journal Entry.
  2. Under Date, select the paycheck(s) date.
  3. (Optional) Input Entry # for the journal entry.
  4. Debit and Credit accounts:
         a. Debit expense account used to track gross wages. ($4,055.00)
         b. Debit expense account used to track Social Security. ($251.41)
         c. Debit expense account used to track Federal Unemployment. ($32.44)
         d. Debit expense account used to track Medicare. ($58.80)
         e. Debit expense account for State taxes. ($137.87)
         f.  Debit expense account for Paychex Processing Fee. ($45.00)
         g. Credit Bank account payroll is deducted from. ($4580.52)

    Note: To make entry easier next time, the next two steps go over how to save the transactions. If you only wish to do the transactions once, please skip these steps.

  5. Click Make Recurring.
  6. Enter a memorable Template Name and set Template Type to Unscheduled; click Save Template.
  7. Click Save.

You might be wondering why there is no payroll liability accounts used and why amount credited to the bank is so large. Reason is, in this example, Paychex would take all of the money out of your account and then pay the taxes on your behalf. Your company is not paying the Federal or State tax agencies directly.

Using the same example, if the employer was responsible for paying the liability your lines on the journal entry would go like this:

  1. Debit expense account used to track gross wages. ($4,055.00)
  2. Debit expense account used to track Social Security. ($251.41)
  3. Debit expense account used to track Federal Unemployment. ($32.44)
  4. Debit expense account used to track Medicare. ($58.80)
  5. Debit expense account for State taxes. ($137.87)
  6. Debit expense account for Paychex Processing Fee. ($45.00)
  7. Credit bank used for processing payroll by amount of processing fee. ($45.00)
  8. Credit Liability account used for tracking payroll liabilities. ($1398.98)
  9. Credit bank account used for processing payroll by net amount of the paychecks. ($3136.54)

Now there is $1,398.98 sitting in a liability account waiting to be paid. When the checks to pay the taxes are written, you would point the check to the liability account used in the journal entry. This will zero out the liability or lower it to the current amount outstanding.

You might have also noticed that the federal and state employee withholding taxes are not in the entry. This is because withholding comes out of the employees gross pay and goes directly to the tax agency. The employer is only a middleman in deducting the money and giving it to the government, this is not an expense to the employer. For withholding information and forms you will need to work with the Payroll service or Third Party software being used.

This is a very basic example, since no insurance or retirement was involved. For more complex payroll transactions you should consult with your payroll service and/or accountant.

Even if you use a Third Party application or service to do your payroll, from time to time you may need to write an employee a check for payroll. The most common case is when an employee is receiving their final paycheck.

First step is to contact your payroll service to give them the withholding amounts and the check number used for the paycheck. To issue a "pay stub" type of check, record the check with split lines.

  1. Go to the Banking menu and select Write Checks or click on the + icon at the top center and under Vendors select Check.
  2. List the appropriate bank account and click to mark To be printed.
  3. Input physical check # being used and list Date you want payroll reported.
  4. For Pay to the Order of: select the appropriate employee and then for Amount list their net pay.
  5. (Optional) Memo - something descriptive such as "Final Paycheck" will show on reports for the bank account.
  6. If only one Account box is available, click button Split Lines.
  7. Break out payroll detail through using the same (liability) account but on multiple lines; for example:
         1: Amount = 600.00 / Description = 30 hours @ $20.00 per hour.
         2: Amount = 800.00 / Description = 40 hours @ $20.00 per hour vacation pay.
         3: Amount = -86.80 / Description = FICA Withholding.
         4. Amount = -20.30 / Description = Medicare Withholding.
         5. Amount = -225.00 / Description = Federal Withholding.
         6. Amount = -55.00 / Description = State Withholding.

    Note: To make entry easier next time, the next two steps go over how to memorize the transaction. If you only wish to do the transaction once, please skip these steps.

  8. Click Make Recurring.
  9. Enter a memorable Template Name and set Template Type to Unscheduled; click Save Template.
  10. Click Save and Print...

When the check is printed you will see the same break down and descriptions listed in the voucher part of your checks.

Once done with the check, a journal entry is needed to clear out the liability account used on the paycheck. This entry will expense the gross wages and the employer's portion of the payroll taxes. It also clears out the liability account back to zero, taking care of the employee and employer portion of the taxes. This is fine since it is actually the service which will pay these taxes.

  1. Go to the Banking menu and select Make Journal Entry or click on the + icon at the top center and under Other select Journal Entry.
  2. Enter in same date as the paycheck.
  3. Under Entry #, reference paycheck this is for.
  4. Enter your journal lines as follows:
         a. Debit the expense account you have for tracking compensation. (Per above example: $1400.00)
         b. Debit the expense account used to track payroll tax expense. (Per example: $132.80)
         c. Credit the bank account used for payroll by the total of employer and employee paid taxes. (Per example: $519.90)
         d. Credit the liability account by the employees net payroll. (Per example: $1.012.90)

    Note: To make entry easier next time, the next two steps go over how to save the transaction. If you only wish to do the transaction once, please skip these steps.

  5. Click Make Recurring.
  6. Enter a memorable Template Name and set Template Type to Unscheduled; click Save Template.
  7. Click Save.

In the rare case that you would pay the taxes directly, the same procedure is used with some slight modifications to your final journal entry. You would only debit the expense account you have for tracking compensation by the net pay instead of gross ($1,012.90 instead of the $1400.00.) and credit the liability account by the same amount.

The taxes would be zeroed out when you create the check to pay the federal and state agencies. When the checks are written, you would list the payroll liability account. This will either zero out the account or adjust the balance to the current amount of payroll taxes still due.

For information on using recurring templates see KB 2033: How do I manually enter a recurring transaction?.

If you would like some information about QuickBooks Online's integrated payroll services and features, please see our KnowledgeBase article 1495:  Can we do our payroll with QuickBooks Online?

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