Payroll Accounting
75
Payroll accounting is a big part of business. It keeps everyone happy including you, your employees, and the government, because it's how people get paid an the record of all expenses associated with paying employees. It can be a challenge, however, especially if you're new to it. There are several parts of payroll accounting that must be reported on your business income statement and balance sheet. So let's take a look at some of the key components of payroll accounting that have to be reported and ways to keep those records straight.
- Salaries, Wages, and Overtime Pay
- Source Documents
- Payroll Withholdings
- Payroll Taxes and Costs
- Payroll Journals
- Payroll Accounting Software
Salaries, Wages, and Overtime Pay
The first component to payroll accounting that must be reported on your business balance sheet is how much you and your employees are going to be paid and in what form, or in other words, are people being paid hourly, salary, or some other way. If your employees work full-time, all overtime pay must also be reported. Each payment type affects your payroll accounting in a different way, so let's take a look at each.
The first payment type we'll discuss is salary pay. Salary is usually associated with "white-collar" type workers, like executives, managers, professionals, and occasionally office employees. If you are on salary pay, it means you are paid a specific amount for the year, broken down by payroll accounting to pay a part of the total each pay period. When on salary, your pay is not determined by how many hours you work.
Hourly vs. Production Based Pay
Most business owners prefer to pay their employees on an hourly basis, but what if there was a better way? What if this way increased production, quality, and work place demeanor? Would you, as a business owner or manager look into it?
There are some inherent problems with hourly pay. The first and foremost is that most hourly workers are not inspired by their pay to do their job well. They get paid if they show up, then they might get a raise if they do better than the next guy. They certainly don't waste their best efforts when they're going to be paid the same amount if they make no effort. The second problem is that most people think they can comprehend future advancement, but really they don't. If a company only does their reviews once a year or every six months, the month of work they really get the best production is the month leading up to the review. Another problem with hourly wages is that sometimes, people simply can't work the forty hour work week. That's not exactly inspiring. But what if you hired someone that could get the same amount of work done in twenty hours that your average employee does in forty? Now that's inspiring.
Production based pay works differently. The employee determines how much they are paid by how much they produce regardless of how many hours they work. This type of payment system can work in any environment and can be quality controlled. A live example of this type of payment system is in a commission based job. Sales companies figured out a long time ago that if they pay their employees by the sale (how much they produce) rather than by the hour, they get much higher production, and generally happier employees. This can be put into practice in any type of environment including construction, office work, automotive, artistic industries, journalism, and call centers. If an employee doesn't have a cap on their potential income, you might see them reach for the stars.
On the other hand, wages are determined by exactly that, hours worked. Wages are often associated with "blue-collar" workers, or production employees. A full-time employee is expected to work forty hours a week, and will be paid more or less depending on if they hit that mark, exceed it, or fall short.
Overtime refers to the amount of time actually worked in excess of forty hours in a work week. Actual time worked does not include vacation time, holiday pay or sick leave. Companies are subject to laws concerning overtime so their employees are not abused. The Fair Labor Standards Act was passed in 1936 and updated in August 2004. The major provisions of this law include minimum wage rates, child labor, equal rights, and what we are focused on, overtime pay. Some employees are exempt from overtime laws, such as salary paid executives because, typically, an executive can determine how many hours they work and their pay doesn't change by working more or less, and their compensation for working is already high. Not all salary employees are exempt, however. Overtime pay, by law, is time and a half, which means, for every hour over forty an employee works, they get paid for an hour and a half of work.
Other types of payment include several different "by-the-job" type situations. Commission is a universally recognized payment type for the sales world where an employee's pay is determined by how much they sale. Contract pay is where a person is paid for completing terms held in their contract, for example, a painter is paid when he completes the square footage he has been contracted to paint. There are also production pay employees, where their pay is determined by how many units they produce, for example, a carpenter shop employee is paid per piece of furniture he builds, regardless of the amount of time spent on each.
Many companies have a combination of payment types all of which payroll accounting has to take into effect and make sure compensation is made correctly. They also have to record the total amount of money being paid out for the total amount of work contributed. There are several payroll accounting software programs available that can help you keep track of it all.
Source Documents
When doing your payroll accounting, make sure to keep a record of all source documents, such as applications for employment, employee contracts, employee reviews, W-4's, and if employees are paid hourly, timesheets. Each of these has an important roll in record and accounting for payroll purposes.
Applications for employment should be kept on file so you can't be sued for biased or unfair consideration during the hiring process, or for not paying your employee what their worth. Prospective employees fill out the application, which makes them liable for what is disclosed on it.
Employee contracts are important to keep as it binds the company to pay the employee a certain amount if the employee holds up his/her end of the deal. A contract also clears up misunderstandings in payroll.
Employee reviews are often accompanied by pay raises, so they are like an addendum to a contract. They should also be kept on file as well.
Employee W-4's are your source to determine employee paycheck withholdings. These must be updated if your employees have any life changing events or would like to change their deduction amounts. W-4's should be reviewed and updated every tax year.
You should keep copies of employee timesheets (or equivalent) kept on file. Employee timesheets are subject to audit by the Labor Department and other government officials to make sure employees are being paid correctly and not being abused unknowingly, so keeping a record or copy of each timesheet is important.
Payroll Withholdings
Payroll withholdings are an important part of every payday and must be delivered and accounted for to the government. Payroll withholdings include federal income tax, Social Security tax, Medicare tax, and state income tax in most states.
Federal income tax withholdings is determined by what the employee filled out on their W-4. The IRS provides tables to determine the rate at which you should withhold income taxes by what the employee claims as taxable wages.
Social Security and Medicare taxes are both an essential part of the FICA tax. Together they equal 7.65% of each employee's gross paycheck up to the first $106,800 you pay the employee. No credits or withholding exemptions are allowed for the calculation of FICA taxes.
State income tax is determined by the state and city within which your business operates. Check with your local tax authorities to determine how much to withhold for this tax.
Other payroll withholdings include employee contributions to benefits, retirement accounts, and charities. These are determined by the employee during the fringe benefits selection process offered by their employer and must be taken into account as well as any employer matches when reporting payroll.
Payroll Taxes and Costs
When doing payroll accounting, payroll taxes must be reported and paid to the federal and state governments. Payroll taxes include all taxes withheld from employee paychecks, as well as required employer matches for FICA. It also includes state and federal unemployment taxes and worker compensation insurance.
FICA tax law states that any employee withholdings for Social Security and Medicare tax from employee paychecks must be matched by the employer. So, since you are required to hold 7.65% of the first $106,800 you pay per employee, you must make a matching payment from your business funds. This is a direct cost that must be recorded and tracked, especially since it needs to be reported quarterly to the IRS.
State Unemployment tax varies from state to state, but if your business pays it, you can get a credit against your Federal Unemployment taxes. This can save some expenses, so look into it for your area.
Workers compensation insurance is required by most states and the rate is determined by the type of industry your business is in, the type of jobs being preformed, and your business's history of claims. This can be a significant expense as it is paid solely by the business, so should be tracked with payroll accounting.
Payroll Journals
The best way to track payroll expenses for payroll accounting is through a payroll journal, which records the amounts needed to be paid, and a payroll disbursements journal, which records the amounts disbursed. The two journals together help determine your total expenses for payroll. It also helps you easily review the pay record and status of each employee.
Payroll journals can be kept by hand or by computer, but either way, they are an indispensable part of payroll accounting.
Payroll Accounting Software
When you do your payroll accounting by computer rather than by hand you can save time, money, and expense. If you currently have a payroll software program, it should have a way to track all expenses associated with payroll. If it doesn't, check with the manufacturer for an add-on that will. If there isn't one available, you should consider switching to a program that does. Your payroll accounting can be significantly easier with a good payroll program. Your business income statement and balance sheet are affected by what happens with payroll and you should be able to see exactly how its affecting your bottom line.
Payroll Accounting Links
- Pay slips and Pay stubs
On payday, you typically will get a paystub or payslip from your employer. The paystub or payslip is a document that informs the employee that their paycheck has been deposited into their account via direct... - Accounting Books
This is one of the best collections of accounting books. All Accounting books that you will need in daily accounts or financial work, audit or management.
