How to Do Payroll Depreciation

Payroll and depreciation are two separate entries in the accounting journal. In most cases, payroll and payroll taxes are entered and calculated before depreciation and other business taxes. Whether calculated and processed manually or using by payroll software, the process of completing payroll and configuring depreciation is quite similar.

Instructions

1. Calculate the total payroll amount for each employee, starting with salaried employees. Configure the salary payment by dividing the total salary by the number of total payroll payments that will be made that year. Divide the total salary, for instance, by 26 if employees are paid twice per month. Deduct the total payroll taxes and costs from the salary, including Social Security, Medicare, federal and state income tax and any applicable retirement or health-care savings costs.

2. Configure payroll payments for your hourly wage employees. Multiply the total number of hours worked by the hourly salary amount, for each employee. Deduct payroll taxes and costs in the same fashion as salaried employees. Enter the total payroll costs for salaried and hourly employees into your journal, if you are completing the payroll manually. Save your calculations in the payroll software so the journal entries are logged accordingly.

3. Calculate the depreciation of the business’ applicable assets to determine the lost value over time. Identify the purchased value, or initial cost, of the property and the number of estimated years the property has in its useful life. Divide the purchased value by its years of useful life to determine the annual depreciation. Divide the annual depreciation by the number of payroll periods to determine the cost of depreciation per pay period.

4. Log the depreciation amount into your journal if using a manual process. Select the “straight line” method of depreciation in your payroll or accounting system to select this calculation of depreciation.

Tips & Warnings

• Use the modified accelerated cost recovery system depreciation method for eligible assets, as defined by the U.S. Internal Revenue Service, for items such as solar electric and thermal systems, windmills and other renewable energy technologies. Speak with your accounting professional for assistance in determining the eligibility of your property and the appropriate depreciation calculations.

References

• AccountingCoach: Payroll Accounting
• Inc.: How to Calculate Depreciation and Amortization
• U.S. Internal Revenue Service: A Brief Overview of Depreciation
• U.S. Internal Revenue Service: Figuring Depreciation Under MACRS
• Database of State Incentives for Renewables & Effeciency: Modified Accelerated Cost-Recovery System (MACRS) + Bonus Depreciation (2008-2012)