What Is Payroll Accounting? The Ultimate Guide (2024)

Now that you know what payroll accounting is and why it matters, you may wonder how to get started. The process involves determining the primary items for payroll accounting and gathering payroll-related documents. From there, you can record payroll entries to the GL.

Here are the five steps for performing payroll accounting effectively.

1. Identify Items for Payroll Accounting

The first step is to make decisions regarding employee compensation. The allotted compensation can significantly impact employee retention and your business’ cash flow.

Here’s a look at the main factors to consider:

Employee Salary and Compensation
Identify the salary range or ideal compensation for each role. How much are competitors paying for the same roles? You can look up this information on websites, such as the Bureau of Labor Statistics (BLS), Glassdoor, Indeed and Payscale. If you’re based in the United States, you’ll need to register with the IRS and get a federal employer identification number (EIN) before you can start paying your employees.

Benefits
Determine the benefits that you will offer employees, such as health insurance, pension plans, child care benefits and paid leave. Having premium benefits will motivate employees to improve their performance and productivity. While some benefits are optional, others are required by law.

Payroll Schedule
Decide how often employees will receive payment based on their hours worked, job title and services rendered. The most common types of payroll schedules are weekly, biweekly, semimonthly (15th or 30th of each month) and monthly.

2. Complete Essential Paperwork

Now that you’ve set up the basics of payroll accounting, it’s time to complete all the essential paperwork for onboarding.

If your business is based within the U.S., here are some common forms that you’ll have to fill out:

• I-9 form: Used to check the citizenship of people within the U.S. All businesses in the U.S. are required to have employees complete this form before being officially hired.
• W-4 form: This document allows employees to designate how much they wish to have withheld from their pay for taxes.
• Direct deposit authorization form: This authorizes employers to deliver payroll to an employee’s bank account.

3. Determine Payroll Payments

The next step is to calculate all the payroll payments within your organization. If you’re doing this manually, you’ll need to determine the gross pay of each employee for the pay period in question first. For hourly employees, all you need to do is multiply the number of hours worked and the employee’s hourly rate.

Here’s an example:

50 hours worked x $40 per hour = $2,000

From there, determine the amount of withholding taxes and subtract them from the gross pay. If federal taxes are $80 and state taxes are $20, here’s how it would be calculated:

50 hours worked x $40 per hour = $2,000 – $100 = $1,900

Based on this calculation, $1,900 is the net pay for this employee. Keep in mind that withholding taxes may vary depending on an employee’s situation and the laws governing a specific country. You’ll have to do this entire process for each hourly employee on your payroll.

If you have a proper payroll system, you can calculate the gross pay and withholdings for each employee automatically. Done right, you’ll be able to get an overview of all payroll-related expenses and transactions.

4. Set Up Chart of Accounts

Set up an expense account and liability account within your chart of accounts. Payroll expenses refer to all costs incurred for employee compensation that are paid and reset every month. In contrast, payroll liabilities refer to money that you owe and have not paid yet.

Here is a list of some examples of primary accounts that should be in your chart of accounts:

• Gross wage expenses (expense): Compensation and salary of employees
• Health insurance expense (expense): Amount incurred to pay for health benefits of employees and their families
• Federal tax and state tax (liability): Amount withheld from employee paychecks for federal and state taxes
• Federal Insurance Contributions Act (FICA) taxes (liability): Combination of Medicare and Social Security taxes
• Workers’ compensation (liability): Amount paid to workers who have become disabled or injured due to their occupation

5. Pay Taxes

After determining payroll costs, you’ll need to pay the taxes owed for a specific period of time, such as quarterly or annually. You will also need to complete a W-2 form for every employee. This provides the government with a record of annual wages, federal and state taxes, health savings contributions and 401(k) contributions.

Even if you’ve paid all taxes due, keep a record of local, state and federal taxes paid. This way, you can avoid penalties in case of a tax audit. For more information, check out our ultimate guide on payroll management.