Payroll Setup in your Chart of Accounts

Whether you are going to be integrating your payroll data from a 3rd party provider into your current bookkeeping platform or utilizing your own in-house payroll system, it is always a good idea to properly setup your corresponding liability and expense accounts in your chart of accounts AND periodically check the data and balances in all of them to ensure nothing is running amiss.

Here are two classic examples of payroll data that could run amiss in the chart of accounts:

  • Health Insurance – If you are deducting health insurance costs from employee paychecks and/or furnishing health insurance costs from company funds, these payroll transactions typically get booked to a liability account (when paychecks are processed), then the payments to your health insurance provider also get booked to this same liability account.
    • You should always stay on top of the exact costs of your health insurance premiums and ensure that you are not deducting too much or too little from your employees’ paychecks.
    • If the company-paid portions of the health insurance costs are not being recognized when the paychecks are processed, then the company portion of the payments to the health insurance company should instead be booked to an expense-type of account.
  • Payday Advances to Employees – I always advise clients to not advance moneys to employees as this creates more scenarios that must be separately tracked in your bookkeeping system. In any case, payday advances to employees could be kept out of the payroll system completely if you want to just treat it as a separate interest-bearing short-term loan only. However, if you want to include non-interest-bearing payday advances in your payroll system:
    • I recommend advancing whole dollar gross wage-type amounts to employees. Then, simply deduct these amounts from the employee’s NET wages from their next paycheck.
      • Remember, advanced moneys to employees, utilizing the payroll system, need to be taxed because you will be deducting these exact amounts from future payrolls. You cannot recognize some moneys as taxed and other payments as un-taxed.
      • The advanced moneys should be directly booked to an Other Current Asset type of account, perhaps called “Employee Advances”. Then the future corresponding net wage payback deductions ALSO will be booked to this same asset account as an offset. Be careful when you advance moneys to multiple employees.


Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.

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