fbpx

Managing Payroll Accounting: A Step by Step Guide

Payroll accounting involves the record of its employees’ compensation including the following key elements:

• Gross salaries, wages, bonuses, and commissions that have been earned

• Withholding for the employees’ portion of health insurance, contributions to savings plans

• Withholding of payroll taxes such as Social Security taxes, federal income taxes, and state income taxes if applicable

• Employer’s portion of fringe benefits such as dental and health insurance, paid vacations and holidays as well as sick days, pension and savings plan contributions

Managing Payroll Accounting

In simple terms, payroll accounting is the process of keeping track of money withheld from employees’ paychecks and calculating the employees’ share of benefits and taxes. It is also a method of recording employees’ compensation. All the aforementioned can be accomplished in five easy steps and they are depicted below.

1. Establish a Company to Hire Employees

You need to take a number of decisions before hiring employees. They include the wage and salary as well as the desired benefit and many more. Before hiring employees, consider the following aspects:

• Obtain EIN: Federal Employer Identification Number is used to track all tax payments made by a business and its free to get.

• Decide on salary and wage types: it means that you will have to take a decision regarding the salary levels and whether you will be paying on an hourly, monthly or annual basis.

• Consider pay periods: it is crucial to determine how often you will pay employees before you actually hire them. Pay period could vary from weekly, biweekly, semimonthly and monthly

• Decide on benefits offered to employees: a key component of payroll is benefits.

• Obtain a worker’s compensation insurance: it provides protection for your workers who get injured during the job or become sick because of the job.

Managing Payroll Accounting

2. Collect Paperwork Needed to Pay Employees

The next step after hiring employees is setting them up in the payroll system of the company. It can be done either manually with the use of Excel or by special payroll software. Every employee will typically need a W-4 and I-9 forms and a direct deposit authorization form. Before starting, your employees will need to fill out the following forms:

• W-4: this is a form where employees provide information about their marital status and the number of allowances they want to have for their dependent children. This information will help you to identify the amount to be deducted from their paycheck.

I-9: before hiring anyone in the United States, an employer needs to verify whether a potential employee is a U.S. citizen. This is typically accomplished by completing the I-9 form.

• Direct deposit authorization form: if you are planning to offer a direct deposit to your employees, you are required to get their permission to deposit funds into their bank account. This can be done by having a direct deposit authorization form completed by each employee. You can save money by paying your employees via direct deposit. It is due to the fact that there will be no need to purchase check stock. However, if any mistake is made in an employee’s pay calculation, it is much easier to modify a payroll check. This is not possible when it comes to a direct deposit payment. When it is done, you will have to issue your employees a check for the underpaid amount or increase the employee’s next direct deposit payment.

3. Make Paycheck Calculations

Paychecks can be calculated manually, however, it is not recommended. If you make one miscalculation it could lead to incorrect paychecks and an underpayment of payroll taxes. Therefore, you are running the risk of getting exposed to penalties and interest as well as unhappy employees.

Specialists recommend using payroll software. It will automatically calculate payroll checks for you, calculate payroll taxes due as well as remind when it is time to submit payroll tax payments. In addition to that, some types of software are able to submit payments and tax forms electronically.

This software assists in avoiding the headaches of manually analyzing payroll. This type of software generally integrates the HR platform with payroll, which pushes changes to time-off and hours directly into payroll and automatically files and calculates taxes. It saves a lot of time.

Managing Payroll Accounting

4.  Make Sure that Payroll is Recorded

Ensuring that amounts are accurately posted to employees’ payroll accounts involves recording payroll on the books. You will have to set up payroll accounts on the chart of account list before it becomes possible to record payroll. A list of accounts, which is used to categorize the financial transactions that your business generates is called the chart of accounts.

Liability account and expense account are the accounts that need to be set up for the purpose of tracking payroll. Money that you owe to others is called liability and the cost that you have as a result of running a business is called an expense.

5. Document and Pay Payroll Taxes

A number of payroll reporting and document retention requirements exist depending on the federal, state and local levels. However, four main tax forms are required to perform payroll accounting and report payroll tax information and they are as follows:

• IRS form 941: this form is used to report the total Social Security and Medicare taxes withheld from employees’ paychecks. It also takes into account the employer’s share of Social Security and Medicare tax.

• IRS form 940: employers are required to pay a tax rate of 6 percent on the first $7,000 that every employee earns under the FUTA. It stands for the Federal Unemployment Tax Act. This form needs to be filled on an annual basis in order to report payments made for unemployment taxes. However, it should be also said that it might be needed to submit payment more often than you submit the form itself.

• IRS form W-2” this form depicts the summary for employees of their wages and deductions taken for the tax year. All the aforementioned information needs to be submitted before January 31st. This form should be also filed with the Social Security Administration.

• IRS form W-3: in simple terms, this form is a summary of all W-2 forms issued to employees. Apart from that, it also needs to be filed with the Social Security Administration together with all W-2 forms. It needs to be filled out electronically with the Social Security Administration at the same time when the W-2 form is filled.

It might be the case that you are overwhelmed by intricacies of learning the ways to perform payroll accounting. You can pass the headache of doing payroll to experienced team of accountants. Without any doubt, you can save some portion of money in the short-term by doing it yourself. However, if you can any miscalculations or miss the due date to file a payroll tax return you might get exposed to additional fees and penalties. Therefore, it might be not worth it.

Payroll accountants play a crucial role in all companies with a number of employees. Despite the size, every business has to comply with state, local, and federal laws associated with payroll reporting and compliance regulations. Payroll accountants perform reporting and financial activities between the business, its employees and the government.


Read More:

Save money for a house or car: tips you need to know
These tips can help you enhance your work-life balance
5 steps to build an online drop shipping business
Digital recruitment and the rise of HR tech: a revolution in making
error: Content is protected !