QuickBooks - Setting Up Payroll

QuickBooks Payroll is a very powerful tool, but only if it is set up properly.

When it comes to processing payroll for a small business, QuickBooks Payroll provides a very powerful tool. However, setting up payroll in QuickBooks can be a daunting task because the default process is totally inadequate for many businesses, especially corporations and partnerships.

By default QuickBooks only provides a couple of accounts for tracking payroll activity such as Payroll Expenses and Payroll Liabilities. But any payroll professional will tell you that tracking payroll and payroll taxes is much more complicated than that. Therefore, QuickBooks Payroll is best used if it is manually set up by the user or a qualified professional.

The first step in manually setting up QB Payroll is to add the necessary accounts to the Chart of Accounts. Accounts must be added in two locations: expenses and current liabilities.

Expenses in payroll include salaries and wages paid to employees and payroll taxes.

Salaries and wages may have to be broken down further. For instance, an employer may need to separate wages paid to employees who are involved directly in the manufacture of a product from the wages paid to administrative personnel. The first type of wages are actually included in the Chart of Accounts as part of the Cost of Goods Sold, whereas the wages paid to administrative personnel is an overhead expense, and these appear in two different places in the Chart of Accounts and on financial statements. In addition, S-Corporation tax returns require that any compensation paid to an officer must be reported separately.

Payroll taxes include the employer's share of Social Security and Medicare taxes, as well as state and federal unemployment taxes. Some employers may choose to lump all of these taxes into a single account, whereas others may create an account for payroll taxes and then list each of the taxes separately as a subcategory in the Chart of Accounts. Personally, I recommend the latter method because it enables a bookkeeper to easily reconcile the business's books to separate tax returns that have to be filed.

Since businesses are required to pay both income-related taxes and to withhold taxes and other amounts from wages, there are a number of payroll-related liability accounts that can be added to the Chart of Accounts. The following is a sample list:

• Federal depository payable (which includes federal income taxes, Social Security, and Medicare taxes withheld from wages, as well as the matching Social Security and Medicare taxes paid by the employer)

• State Unemployment taxes payable (which may include amounts withheld from employees)

• Federal Unemployment taxes payable

• Retirement funds withheld

• Garnishments withheld

• Union dues withheld

Anything that is withheld from an employee's paycheck that must in turn be remitted to another agency is considered to be held in trust for the employee, so it is important that each of these liabilities be tracked in separate accounts.

Once the necessary accounts have been set up in the Chart of Accounts, it is necessary to select Payroll Items, and each payroll item must be linked to a specific account in the Chart of Accounts. This will be the subject of a future blog.