Small Business Bookkeeping & Accounting

This one's a bit trickier...you've actually done a lot of things when you write that paycheck. If you have an accounting system and are using payroll, you should be in good shape - but even then, you may need some understanding of exactly what that system is doing for you. If you're doing payroll by hand, you will calculate and record the components described below.

Gross wages get debited to the wages expense account - divided properly between direct and indirect labor. (Recall that gross wages for people actually producing your goods or providing your services are direct expenses; gross wages for the office help and sales are indirect expenses.)

Payroll taxes. Some of these come out of the employee's check - the federal withholding and the employee's share of FICA. Others come out of your pocket, like the employer portion of FICA, state and federal unemployment taxes. The ones that come out of your pocket require two entries: they get debited to payroll tax expense (either direct or indirect, depending on where the employee's wages go), and credited to the proper liability account - either FICA payable, Fed payable, UI payable, FUTA payable or Workers Compensation payable.

Determining Tax Liabilities. For each of these you have to figure the total due based on the gross wages for that period - these taxes are figured as a percent of gross. For example, when the FICA and Medicare tax is 7.65% of gross wages, you take the gross wage, multiply it by .0765, and that is what you owe for the employer portion of FICA. You can get a chart which shows the Federal and state taxes due for each employee, based on their W-4 status and earnings. Unemployment will be based partly on a state multiplier and partly on your company's unemployment history. Workers compensation will depend on the industry code your employees work under, as well as your company's performance.

All the taxes that are withheld from the employee's check as well as those which come out of your pocket - are listed as liabilities, and are easier to deal with if you sort them out by what kind of tax they are. In the liability accounts, there is no need to separate direct from indirect numbers - it's just plain money you owe, and it doesn't matter whether it comes out of the employees check or out of you pocket. The FICA payable, for example, will contain all the FICA that was withheld from everyone's check, in addition to the amount that you are matching as the employer.

Here's the picture of what you do with payroll, using a fictitious shop person who's going to have his salary listed under 4010, direct labor. In this payroll period, he made $700.00. His workers' compensation rate is 13.2 %.

	Debit	Credit
4010 Gross wages	700.00
2102 FICA withheld		53.55
2100 Fed withheld		42.00
2104 State tax withheld		19.00
1001 Cash (paycheck amount)		585.45

Up to this point, the entries balance, as they must. Now, to enter the employer's tax expenses:

	Debit	Credit
2102 FICA Payable		53.55
2103 FUTA Payable		5.60
2105 State Unemployment payable		19.60
5015 Payroll Tax Expense	78.75
2107 Workers Comp Payable		92.40
5023 Workers Comp Expense	92.40

As a side note, here's a point you need to keep in mind: that person, who you thought was costing you $585.45, because that's what her paycheck says, or is costing you his gross wage of $700.00, is actually costing you $871.15 ($700 wages plus the payroll tax costs to you, which in this case total $171.15). If you're adding any benefits like insurance or retirement, put those on top. This is a prime example of the kind of overhead you need to make sure gets added into your pricing structure.