How to Do Payroll Accounting: A Step-by-Step Guide for Employers

In 2023, the Social Security wage base increased by almost 9%, from $147,000 to $160,20015. This means employers must now withhold social payroll accounting security tax on employee earnings up to $160,200 instead of $147,000. If a business fails to adjust as per these changes, it can lead to under-withholding or over-withholding, resulting in compliance issues and even heavy fines. Similarly, incorrect tax withholdings can result in fines from the IRS, which can be a substantial financial burden.

Time tracking and attendance tools

• Fringe benefits for employees include health and dental insurance, vacations, and sick days.
• Federal laws require payment for these hours for employees who are not able to control their hours.
• Many employers give their employees two weeks of vacation after three years of service, with more weeks given after 10 years of service.
• This one covers FUTA taxes, which fund federal unemployment benefits.
• Having readily available documentation simplifies the process and demonstrates your commitment to accurate record-keeping.

Over the past few decades, however, the costs for these group policies have risen significantly. Today the insurance premium for family coverage can be more than $10,000 per year per online bookkeeping employee. As a result of these escalating costs, most companies now require employees to pay a portion of the premium cost; this amount is usually collected by means of employee-directed payroll withholding. If the employer pays the insurance premium in advance, a current asset such as Prepaid Insurance is used.

Employee management

However, some states have set higher minimum wages, so businesses must comply with the higher rate if it applies to them. For example, California’s minimum wage is $16 per hour6, which is higher than the federal level. Payroll is a liability, as are all expenses related Retail Accounting to it like wages payable, salaries payable, or accrued wages payable.

How Much Does Small Business Payroll Software Cost?

• These entries are essential for accurately calculating and reporting your payroll taxes.
• It allows you to do more with less—less money, less headcount, and less time.
• This simple guide for small business owners explains all the payroll accounting basics and show you how to correctly add paydays to your books.
• Tracking payroll liabilities is not something to take lightly, and it should be a key part of every company’s balance sheet.
• The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received).

Additionally, managed accounting services can provide expert support and handle your payroll for you, allowing you to focus on other aspects of your business. Form 941, the Employer’s Quarterly Federal Tax Return, reports federal income tax withheld from employees’ wages, along with your portion of Social Security and Medicare taxes. Accurate and timely filing of Form 941 is crucial for complying with IRS regulations. Regularly reconcile your payroll accounts with bank statements and employee records. This helps identify discrepancies early on, ensuring that all payroll transactions are accurately reflected in your financial statements.

Payroll Reports: What You Need to Know

• Generally, the cost of fringe benefits should be expensed when they are earned by the employee, not in the period in which they are paid.
• A bachelor’s degree in accounting, business administration, or similar can be a good starting point, but make sure the college or university you join is accredited.
• Amounts withheld from employees for state income taxes are also reported on the employer’s balance sheet as a current liability.
• A payroll vendor can save your organization precious time and money while reducing errors and increasing efficiencies.
• The combined amount to be remitted to the federal government for this one employee is $5,800.
• However, if you use a manual accounting system, you will need to create journal entries.

This will ensure your journal entries have additional eyes on them before they post; it can also be helpful if you’re out on a day that payroll journal entries need to be posted. To calculate payroll, identify employee wages, complete essential paperwork, calculate gross pay and deductions, set up charts of accounts and pay taxes. To automate the entire process, you can get a payroll system to get everything done in less time. Yes, small businesses benefit significantly from payroll software because it streamlines the payroll process, ensuring accuracy and compliance with tax laws.