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What is Payroll Accounting?

Payroll Accounting is the method of accounting for payroll. Payroll is the aggregate expenditure on wages and salaries incurred by a business in an accounting menstruation. It can also refer to a listing of employees giving details of their pay.

Payroll includes the gross pay due to the employee and employer taxes. The gross pay is divided into net pay actually received by the employee and deductions made from the gross pay for employee taxes and other deductions such as pension contributions, healthcare contributions, and wedlock subscriptions.

In payroll accounting it is of import to distinguish betwixt employee taxes which are deducted from the employees gross pay and are therefore paid past the employee, and employer taxes which are in addition to the gross pay and paid past the employers.

Both payroll taxes are usually nerveless by the employer and paid over to the relevant taxation authority.

The assay of payroll is shown below:

Payroll Bookkeeping and the Recording of Payroll

Different Countries have their ain employer and employee tax situations and the taxes and deductions may have different names, but the basic payroll bookkeeping procedures are the aforementioned.

As an example of payroll accounting, if gross pay is two,000, employee tax is 500, and other deductions are 100, then the net pay due do the employee is ane,400. The payroll bookkeeping journal entries would be every bit follows:

Payroll – Gross pay

Account	Debit	Credit
Gross Wages	2,000
Employee tax control		500
Other deductions control		100
Net pay command		i,400
Total	ii,000	ii,000

The gross wage is the expense charged to the income argument. The command accounts are all balance sheet accounts representing liabilities for the amounts deducted from the payroll. The employee tax control represents the amount due to the tax authority, the net pay control represents the amount due to the employee, and finally, the other deductions control is the amount due to whichever body the deduction was made on behalf of, for instance, the pension scheme, healthcare scheme or union.

Employers Tax Journal

In improver the employer payroll tax liability needs to exist recorded with the following payroll journal entry:

Payroll Accounting – Employer tax

Account	Debit	Credit
Employer tax	300
Employer tax control		300
Total	300	300

The first entry is the expense charged to the income statement, and the 2d entry is the liability to the revenue enhancement authorities recorded in the balance canvas control account.

Pay the Employee the Net Pay

Net pay is the gross pay which a person earns less taxes and other deductions such every bit alimony contributions. It is the corporeality of pay which a person gets to proceed.

The internet-pay formula can be stated every bit follows:

Net pay = Gross pay – Taxes – Deductions

When you pay the employees using cash, the entry is to the net pay command account

Payroll Accounting – Gross pay

Business relationship	Debit	Credit
Net pay control	1,400
Cash		ane,400
Total	i,400	1,400

Any departure on this account should be reconciled by the payroll accounting team, as it ways an employee has either been underpaid or overpaid.

Pay the Tax to the Tax Authorities

Next the tax authority is paid and the tax control accounts are cleared using the following payroll revenue enhancement accounting journal.

Payroll – Payment to revenue enhancement potency

Account	Debit	Credit
Employee tax control	500
Employer tax control	300
Cash		800
Total	800	800

Once again the control accounts should cyberspace to aught after the payments have been fabricated, and any difference needs to be investigated before completing that periods payroll procedure.

Pay Over the Deductions

Finally, the other deductions are paid to the advisable body such as for example a alimony scheme, healthcare scheme, or union, and the control accounts are cleared using the following payroll deductions accounting journal.

Payroll Accounting – Payment of other deductions

Business relationship	Debit	Credit
Other deductions command	100
Cash		100
Total	100	100

In the example higher up, the other deductions can refer to many types of deduction such as pension contributions, healthcare schemes, spousal relationship subscriptions. If there is more than than i blazon of deduction, it is best to maintain a control account for each one so that the liability to a particular organization is conspicuously identified in the balance sheet of the business.

Other Payroll Bookkeeping Terms

Other payroll terms include the following.

Fringe Benefits

Fringe benefits are payments in kind by a business organisation to an employee in addition to their normal remuneration wages or bacon for their work. For instance, a business provides an employee with a fringe benefit when they allow the employee to use a business vehicle to commute to and from work.

Examples of employee benefits include holiday pay, subsidized meals, auto fringe benefits, pension schemes, business wellness insurance, childcare assistance, life insurance benefits, and employee discounts.

The advantage of an employer paying fringe benefits is that some employee benefits are exempt from taxation, and so for the same cost to the business organization, the employee receives a greater benefit than had the corporeality been paid to them as taxable wages or salary. Non all benefits are exempt from taxation, others may be field of study to fringe benefits tax.

Fringe benefits are sometimes referred to every bit employee benefits or benefits in kind.

Payroll Garnishment

A garnishment is a legal procedure in which one person (the garnishee) is ordered to withhold money due to some other person and to pay the money held over to a third party. Then for example, if A owes coin to B, and so C can be instructed to hold coin due to A, and to pay the money withheld over to B.

A typical example is when an employer is asked to garnish wages sometimes referred to as a payroll garnishment, in this case a garnishment notice is served on the employer who in accordance with the garnishment social club, is instructed to withhold money due to the employee for wages, and to pay that money to a third political party, usually the courts, for unpaid taxes or child support.

For a business concern, a garnishment payable represents monies deducted from the employee and owed to the courts or the taxation authorities, and is shown as a current liability in the residue sheet of the business.

Time and a One-half

Fourth dimension and a half is a term used in relation to the payment of employees past a concern.

An employee has a normal hourly pay rate, if for a detail period of time the employee is on time and a half pay, then for the hours worked during that flow, the normal rate is multiplied by one and a half.

Time and a one-half pay is ordinarily paid for working above and beyond normal hours, for case, overtime, banking concern holiday, weekends etc.

How to Calculate Time and a One-half for Overtime

If for example, an employee has a normal hourly rate of 10.00, and worked for 40 hours of which v hours were time and a one-half overtime, then the calculation would exist as follows.

Normal rate of pay 10.00 per hour Time and one-half charge per unit of pay = one.5 x 10.00 = fifteen.00 per hour Fourth dimension and half overtime pay = Overtime hours  ten 15.00 per hour Fourth dimension and half overtime pay = 5 ten fifteen.00 = 75.00        

This overtime pay would and so exist added to the normal pay of 35 10 ten.00 = 350.00, to give total pay of 425.00.

About the Author

Chartered auditor Michael Brownish is the founder and CEO of Double Entry Accounting. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his ain. He has been a managing director and an auditor with Deloitte, a big iv accountancy house, and holds a degree from Loughborough University.

Jan 14, 2020

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Source: https://www.double-entry-bookkeeping.com/payroll/payroll-accounting/