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Anthony Nguyen

08 Aug 2020

8 minutes read

The Basics of Payroll Accounting

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The Basics of Payroll Accounting

 

If you have your own business and pay yourself or your employees, payroll accounting is involved. 

So, what is payroll accounting? It is the recording of your employee’s compensation. 

This may include the following:

  • Wages
  • Salaries
  • Commissions
  • Bonuses
  • Hourly employees 
  • Overtime pay

Payroll accounting is not only limited to the income earned by your employees, but it also includes taxes.

 

These are some of the typical payroll taxes:

  • Federal withholding taxes
  • State withholding taxes (if applicable)
  • Social security taxes
  • Medicare taxes

 

Health insurance, wage garnishments, and retirement accounts are other elements involved in payroll accounting. Some items may be familiar, and many of them are clearly stated on your pay-slip.

But, not all elements are recorded in the same way. Some may be represented as expenses and others as liabilities.

Let us learn more about payroll accounting and how it should be recorded.

 

Salary and Wage Types

Before hiring anyone, you will first decide what their salary and wage type be. How much will you pay for them? Will they be a salary or an hourly employee?

The next thing you’ll need to decide is how often will you pay your employees. You can either pay them weekly, bi-weekly, semi-monthly, and monthly.

 

Benefits

The next thing you need to figure out is what type of fringe benefits will you give your employees. These kinds of benefits are a form of payment for work rendered. And for this, you will need to decide how much can you contribute to these benefits.

 

Form W-4

When you’re hiring an employee, you need to get certain information from them. This is about how you should withhold money from their paycheck. You can get these details from them by asking them to fill out a Form W-4.

Once the Form W-4 is completed, you can now start your payroll accounting. 

A Form W-4 contains how much of your employee’s salary should be withheld and remitted to the IRS. It will be the responsibility of the employee to fill this form correctly. And your responsibility is to withhold the correct amount and send it to the proper agency.

 

Form I-9

All employees are required to have the Form I-9. This form verifies the employee's right to work in the U.S. and/or their citizenship.

Employees will need to complete the first section of Form I-9. They will provide details like their name and address. They also need to specify that they are eligible to work in the U.S.

While the employer will need to complete the second section of Form I-9. In this part, you will need to specify the acceptable documents provided by the employee. 

 

Direct Deposit Form

You will need to complete a direct deposit authorization form if you will pay your employees electronically. This form has a section that requires the bank account information and signature of the employee.

Direct deposit is a faster and cheaper option of paying your employees compared to writing checks. Not only do you save money by not ordering checks, but you also save time by not writing on them physically. And at the same time, your payroll procedure becomes automated.

Now, that you understand all the details you need in paying your employees, its time to look more into the details of payroll accounting.

 

Recording Payroll

Payroll accounting involves the recording of cash, expenses, and liabilities. These are some of the common types: wages, payroll taxes, and fringe benefits.

 

Payroll Taxes

Payroll taxes are taxes associated with payroll accounting. Employees pay a specific amount of taxes based on how they filled up their W-4. And as the employer, you will also need to pay taxes.

According to the Federal Insurance Contributions Act, you and your employee must pay a 7.65% tax. This is a tax expense required for the employee and employer that is used to fund social security and Medicare in the U.S. It is based on the gross wages earned by the employee. 

More specifically, 6.2% goes towards social security and 1.45% goes towards Medicare. Combined, 7.65% in FICA taxes. 

Meanwhile, FUTA taxes are paid only by the employer. This is used towards funding Federal Unemployment. FUTA is a tax based on the first $7,000 of wages you pay each employee. 

State withholding taxes (if imposed) are based on W-4 information for the employee but there is an employer portion too.

SUTA taxes represent state unemployment taxes. SUTA is only paid by the employer on behalf of each employee. SUTA is unemployment insurance. Funds collected are used for individuals who are laid off from their jobs.

 

How to Pay Your Payroll Taxes?

After you have properly withheld the amount for FICA, Federal, and Medicare taxes, you will need to compute your portion in FICA, Medicare taxes, and SUTA.

Then, you remit accurate amounts to each agency either semi-weekly or monthly. It depends on the size of your organization.

You will report your payroll taxes on Form 941 quarterly. And for FUTA taxes, you will report these on Form 940 annually.

 

Payroll Software

To have a more organize and easier way of recording, filing, and paying your employees' salary and taxes, you can consider getting a payroll software.

Today, payroll systems can calculate wages and taxes and track hourly employees. They can also prevent human errors associated with manual payroll.

When it’s time to fill payroll tax forms, most of these systems can auto-fill in the information needed.

 

Who can manage your payroll accounting needs?

 

DD Business Analyst can assist you with your payroll accounting. Whether you have a lot of employees, or you hired your first one, we are here to help you with all your accounting and finance needs. 

 

Contact Support@DDBusinessAnalyst.com to help your small business needs and Book 30min Free Consultation.