10-Minute Study Guide
This guide will help to explain the various items, and definitions, needed to gain a clearer understanding of payroll accounting.
To start, payroll and benefit items included within a company’s income statement and balance sheet (many of which are subject to state and federal regulation) may include:
- bonuses and/or commission to employees
- payroll taxes and costs, such as
- Social Security
- federal and/or state income tax
- federal and/or state unemployment tax
- worker compensation insurance
- employer paid benefits such as:
- sick pay
- retirement plan
For any company with employees, there must be an account of payroll and fringe benefits, which is a collection of various benefits provided by an employer and exempt from taxation as long as certain conditions are met. Let’s assume that the company follows the accrual method of accounting, which is the method under which revenues are recognized on the income statement when they are earned. Utilizing the matching principal, which requires a company to match expenses with related revenues in order to report the company’s profitability during a specific time period, we are better equipped to understand how payroll and fringe benefits are reported.
Starting with the Basics
Each new employee must fill out the necessary payroll-specific forms connected within the company’s payroll system. These forms can include a W-4, insurance and medical (if the company provides this), direct deposit information, etc.
Timecard information, especially if that employee will be nonexempt, meaning that they are available for overtime pay, will need to be collected and documented. It is important to also verify this information recorded by the employee’s supervisor or manager.
Entering and updating employee wage changes as needed, such as pensions or the number of tax exemptions, is important to maintain accurate, up-to-date information related to how their wages will be taxed.
Calculating taxes based upon the available IRS tax table will provide you a guideline to use when totaling the deductions to be withheld from the employees gross wage. Wage deductions, such as for medical or dental insurance, also need to be determined.
Documentation is critical for this process, and it is helpful to summarize information in a journal entry, created through the payroll register you create for each employee.
Using the information created in the payroll register, you may print paychecks and include all the tax deductions and any advances or raises. It is also important to notify your direct deposit processor of payments being made, also including a summary of this for the employee.
Deposit employee withheld taxes and employer matched taxes at the appropriate authorized bank. Some small businesses who struggle with some of these essentials find that outsourcing payroll to a third party is a viable option.