Payroll is the moon landing of accounting because there are many variables to consider and plenty of potential errors. If your business has employees, you’re responsible for accurate accounting of wages and payroll deductions for each worker. You’re also required to calculate and remit payroll taxes. Some of these taxes are withheld from wages and others are employer expenses. The lag between paying wages and remitting payroll taxes doesn’t delay the accounting.
You must account for gross compensation paid to employees before any deductions. This is your tax-deductible expense for wages.
Your accounting for payroll should also include records of gross wages paid to each employee. You’ll need this for annual wage reporting sent to employees and government authorities. Most fringe benefits you provide to employees are also accounted for as compensation. They are included in annual reporting of wages unless the law permits their exclusion.
You withhold from wages the employee share of taxes. This includes an amount of employee income tax liability determined from standard tables plus a fixed percentage for employee contributions to Social Security and Medicare. These are still accounted for as gross wages. You merely have to record accrued withholding and the subsequent payments.
Most states also require withholding from wages of state income tax. Separate accounting is required for these taxes withheld and later remitted.
When remitting amounts withheld from employees for Social Security and Medicare, you include a matching employer amount. Account for the non-withheld amounts as a business expense for payroll taxes.
Unemployment tax is another tax expense paid by employers. It isn’t withheld from wages. All payroll costs that are employer obligations are accounted for when incurred so that future payment is applied to the accrued liability.
Some types of deductions from wages reduce the amount of an employee’s compensation subject to income tax. These deductions, such as retirement plan contributions, reduce only the assessment for regular income tax but are still subject to FICA taxes.
Other types of payroll deductions are deducted from net pay after taxes, such as union dues and insurance premiums. So your accounting system has to maintain separate tracking for each category of payroll deduction.