What is payroll accounting?

By hrlineup | 13.02.2020

Withheld taxes, insurance, overtime, benefits, allowances! All these and the salary and wages are still to be considered. The payroll is where you will find all this information. Miss out on one aspect, for one employee, and it could have massive consequences for the company. Payroll accounting facilitates clarity, cuts back on errors, and manages a complex and intricate process.

Keeping track of employee compensation and payments is essential for an organisation of any size. This is where payroll accounting comes in. When looking to answer what is payroll accounting, you will find that it is the way a company records employee compensation. This also ensures that companies stay on top of paying taxes as well as giving out benefits and paying allowances.

What is involved in the payroll accounting process?

There are four main steps that should be followed in the payroll accounting process. They are as follows: –

  1. Ensure registration.

The government requires some paperwork to be in place to enable a company to create a payroll. These include having a Federal Employer Identification Number for tracking taxes. The next step is to ensure that the employees are set up within a payroll system, preferably using a payroll software. For this, they will need to fill out the I-9 and W-4 forms. These collect documentation and personal information.

  1. Salary Levels

At this stage you determine whether your employees will be earning salaries, or whether it will be wages. This will help determine annual payments or hourly payments, as well as pay periods.

  1. Select Benefits and Insurance

There are benefits that you will offer employees in addition to their salary or wages. These include health insurance, or a 401(k) plan. It is essential as part of the process to outline what these will be. With these benefits in place, you need to have a software that can calculate what each person is to be paid, especially from a tax perspective.

  1. Keep a record

The final part of the payroll process is keeping a record and a chart of accounts. This ensures that you can refer to it when need be and are clear on all payments that have been made. This avoids one dealing with penalties or charges.

When understanding payroll accounting, consider the legal requirements for each of the states. There are also several performance obligations that must be factored into payroll process in accounting. These include: –

  • The direct compensation of labor which includes salaries and wages as well as overtime.
  • The indirect compensation which includes commissions and bonuses.
  • The legally required expenses which include sick days, vacations, holidays as well as health insurance.

Within payroll bookkeeping, one must remember that there are some expenses that are assumed by the employer, while others are assumed by the employee. These needs to be clearly separated and properly calculated. For the payroll manager, the budgets will be based on estimates at the beginning of the year. Flexibility will be part of payroll accounting in case there are any changes to these estimates.