- Payroll accounting is tightly focused on all business expenses associated with employees.
- Accounting software can make payroll accounting easier.
- Payroll accounting can help businesses grow strategically and avoid going overboard.
- This article is intended for small business owners and accountants who want to understand payroll accounting and how it relates to broader accounting practices.
Accounting is an essential part of any business, but have you heard of payroll accounting? As the name suggests, this narrow focus of accounting targets everything to do with the payroll – not just wages and salaries, but also benefit costs and payroll taxes. A huge benefit of payroll accounting is a better understanding of the cost of each employee, which is the key to smart growth. No matter what industry your business is in, the best accounting software can improve your understanding of your payroll accounting and how it impacts your bottom line.
Why is payroll accounting important?
Payroll accounting is a system for tracking business expenses related to payroll. This includes individual employee compensation as well as payroll taxes, employer portions of federal benefit deductions, employee benefits, and other deductions.
Payroll accounting systems not only ensure that you keep careful track of your salary expenses, but also that you comply with local, state and federal labor laws and that you do not break any tax rules.
Without payroll accounting, you cannot get an accurate view of the total cost of your employees. This makes it difficult to understand the added cost of each additional employee you hire, and also to decide whether to hire full-time employees, contractors, or part-time hourly workers when you need to increase your workforce.
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Payroll accounting is very different from other types of accounting, like financial and managerial accounting. Like financial accounting, payroll accounting involves recording and categorizing business transactions, but it focuses exclusively on employee-related expenses. Unlike management accounting, payroll accounting does not require any complex analysis on which to base business decisions.
To remember : Payroll accounting is an accounting process that focuses only on employee-related expenses, including wages and salaries, payroll taxes, benefit costs, and paid time off.
What types of expenses fall under payroll accounting?
|Costs||What it is|
|Employee compensation||Salary, commissions, tips|
|Social charges||Federal, state or local taxes paid on employee salaries|
|FICA taxes||Employer’s share of health insurance and social security payments for employees|
|Benefits Payments||401 (k) matching payments, health insurance premiums and other costs associated with offering benefits|
|Other benefits||Reimbursement of tuition fees, childcare and other social benefits|
While payroll systems automatically deduct portions of employee benefits from their paychecks, payroll accounting does not include these payments because the company does not pay them. These payments are rather discretionary for employees and come directly from employee funds.
Payroll accounting does not include rent, utilities, office supplies, inventory, or any other expense that is not related to employee compensation or benefits, or taxes other than taxes. on salaries and FICA payments. Sales, excise and corporate taxes, for example, are all excluded from payroll accounting records.
How to set up payroll accounting
Payroll processing can be complicated, but accounting software makes it a lot easier. It is important to properly configure your payroll accounting process in order to obtain an accurate picture of your payroll expenses and to ensure compliance with labor and tax laws.
Here are the six steps to set up payroll accounting for your small business:
- Set up accounting software. Without decent accounting software, you will have to keep track of all your payments manually, which can be quite difficult. The right accounting software can make this a lot easier.
- Create accounts for each type of expense. As part of setting up your accounting software, you will need to set up accounts for each expense that is part of your payroll, including employee compensation, commissions, bonuses, payroll taxes, 401 (k ) and the FICA deduction.
- Set up recurring payments to employees. Once you’ve set up your accounting software, you can program the software to issue regular payments to your employees.
- Categorize the payment portions. Divide your employee payments into different categories for each covered expense (Medicare, taxes, etc.).
- Process payments. As your employees complete their work, you will make regular payments to them, tracking all portions of those payments from your business in your payroll accounting program.
- Reconcile regularly. Even if you have payroll software that issues payments to your employees and categorizes them automatically, it’s still important to regularly check those payments to make sure they’re accurate and broken down correctly.
Once you’ve set up your payroll accounting system, you can process the payments yourself or through a third-party payroll service. You can also generate reports that break down your expenses by category and make it easier to prepare tax returns and other forms.
In addition to these routine functions, payroll accounting can help with many other accounting processes, including financial accounting. This allows you to have a more detailed overview of your employee-related expenses.
How Accounting Software Can Help You With Payroll
Accounting software is an essential tool for small businesses, and it is especially useful for administering and tracking employee payroll. With the right accounting software, you can process individual payments, set up automatic payments, or integrate with third-party payroll providers. You can also get a better idea of ââthe total cost of your employees by tagging expenses and running detailed reports.
Here are some things you can do with accounting software that helps payroll:
- Schedule automatic payments. With the right software, you can set up regular payments for each payroll cycle. Automating the process saves you time and frees up resources for more urgent tasks.
- Break down payments. Each payment to each employee can be broken down into the appropriate categories.
- To create detailed accounting reports. You can compile payment records for a single payroll run or over a certain period. You can also track how your payroll spending changes over time as the size and composition of your workforce changes.
- Integration with other systems. Accounting software can integrate with other financial programs, including your financial accounting records. Most software can even export recordings to files that you can review through a spreadsheet.
- Start, stop or change payments. You can add, remove, or edit payments as employees join or leave your company, as their compensation changes, if they move out and taxes applied to their paychecks change, or if corporate rates change. taxation change.
While accounting software has many benefits, especially for payroll accounting, it doesn’t do everything. More importantly, while accounting software can give you a great head start when preparing tax forms for your small business, most accounting software does not have functionality for automatic preparation or submission. income tax returns. You may need to use separate software or an online portal offered by your local tax authorities for this.
Did you know? Accounting software and payroll software often integrate tightly, as the biggest expense for most businesses is labor costs. Use these integrations to reduce inconsistencies in your financial records.
Payroll accounting is crucial for smart growth
Understanding the cost of an employee is almost impossible without clear accounting records. Whether you run payroll in-house or outsource to a payroll service, be sure to tightly integrate your payroll operations with your accounting software. This not only paints a clearer picture of the cost of each employee to your business, but also helps you plan for business expansion and determine when to recruit new people. Smart business owners keep a close eye on every penny in and out, especially given the biggest expense – people.