Employees are an essential asset for all organizations. Whether a company is a family-run business, a bakery consisting of 4 employees, or an internationally operating corporation, every company has to utilize payroll accounting in order to pay its employees accurately and without delay.
All employees of a company receive their salaries or wages through the payroll department. Thus, payroll accounting can be described as the calculation, management, recording, and analysis of employees’ compensation. But it is not limited to only these functions.
It also includes reconciling for benefits and withholding taxes and deductions that apply to compensation. Payroll accounting is highly affected by a country’s legal requirements and furthermore on state or local city’s legal obligations.
For small businesses, business owners themselves might do the payroll accounting. For medium businesses, usually, a bookkeeper or an accounting clerk carries out the duties of payroll accounting while for large businesses, the companies might choose to hire a payroll accountant or outsource payroll accounting altogether.
In this article, we look at the guide for creating and recording payrolls in your organization. Stay with us as we take you through the process and make life easier for you.
5 Key Steps of Payroll Accounting
The 5 key steps of Payroll accounting that we mentioned earlier, let’s discuss each one of them separately now.
An important decision when you first hire your employees for your business is to decide how you will compensate your employees. For this, let’s break down your decision into the available choices that you have:
After you have registered your business with the IRS to receive a Federal Employee Identification Number, you can decide how much you want to pay your employees. How you are going to pay in wages will be important to determine how you will record the payroll information.
The next hurdle is deciding if you want your employees to work hourly or annually. Usually, part-time employees are paid on an hourly basis. Now decide if you are going to pay them monthly or weekly.
This category includes all types of employee compensations that you will be offering to your employees apart from their basic salary. Health insurance and 401(k) plans are some of the most common employee benefits offered by most companies. You will have to decide how much the company will pay for these benefits and how many deductions will be made from employees’ salaries.
After hiring the employees, the next step is to compile all the forms that you need the employees to fill out for you. This information provided by the employees is then entered directly into the payroll system. The following forms will be given to new employees to fill out for payroll accounting:
Every employee has to fill out this form before they start working for a company. They also have to provide other forms of documentation with this form, including a driver’s license, Social Security card, and a birth certificate.
The W-4 form is essential for when you file taxes as it shows how much the government can take out of an employee’s paycheck for taxes.
Direct Deposit Authorization Form
New employees will fill out this form if they prefer their paycheck deposited into their bank accounts directly. This option is also better for an accountant as it helps avoid manual payments when filing employee information.
Payroll software is an indispensable tool for this step. While you can calculate paychecks manually, it would be the last thing that we would recommend you do. Just a single calculation error can result in the processing of incorrect paychecks and an underpayment of payroll taxes. Not only will this irritate your employees but you might also be subject to interest and penalties.
Therefore, payroll software for calculating paychecks should be the best way to go about it. The software will automatically calculate payroll checks and payroll taxes due. It will also send you a reminder of when it’s time to submit payroll tax payments. It also gives you the convenience of submitting payroll tax forms and payments online with the software.
The fourth step is about entering payroll on your accounting books. This makes sure that all amounts are accurately posted to the correct payroll accounts. For recording payroll, you will first set up payroll accounts on your chart of accounts list. The chart of accounts is a list that categorizes all the financial transactions of your business. Let’s see what accounts you will need to record payroll.
The accounts that you will need to record payroll will be generally expense or liability accounts. For example, an employee’s health insurance will be an expense as your business will pay to the vendor that provides health insurance benefits for your business. Similarly, workers’ compensation will be a liability as it is the amount you owe to your insurance provider.
File and Pay Taxes
The next step requires you to fulfill some payroll reporting and documentation requirements on the federal, state, and local levels. For now, we will only discuss what the federal government requires.
Following is a list of all the tax forms that you will be submitting to file and pay taxes:
|Tax Form||Due Date|
|IRS Form 941||This IRS form is submitted a month before the quarter comes to an end.|
|IRS Form 940||This form is submitted almost on an annual basis, before the end of the first month|
|IRS Form W-2||This form is electronically filed through the SSA before the end of the first month i.e. Jan.|
|IRS Form W-3||This application is also filed electronically in compliance with the SSA before the end of the first month i.e. Jan.|
Now that you are familiar with most of the steps of calculating and recording payroll for your employees, you can create payrolls of your own and initiate the process in your organization. You can get in touch with accountants for ecommerce companies to know more about what the process entails and how it can benefit you in the long run.