Payroll

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.

In Payroll you have:

• the wages themselves

• the taxes the government makes you withhold

• taxes that you have to pay that you don't withhold

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.)

Some payroll taxes come out of the employee's cheque - the federal taxes and the employee's share of EI & CPP. Others come out of your pocket, like the employer portion of EI & CPP. 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 EI payable, CPP payable, Federal Tax payable, or Workers Compensation payable.

For each of the tax liabilities 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 CPP is 2.40% of gross wages, you take the gross wage, multiply it by .0240, and that is what you owe for the employer portion of UIC. You can get a chart which shows the Federal tax, EI and CPP due from each employee, based on their TD1 status and earnings. 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 cheque 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 CPP payable, for example, will contain all the CPP that was withheld from everyone's cheque, 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 7.9 %.

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

As a side note, here's a point you need to keep in mind: that person, who you thought was costing you $421.71, because that's what her paycheck says, or is costing you his gross wage of $700.00, is actually costing you $788.27 ($700 wages plus the payroll tax costs to you, which in this case total $88.27). 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.

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Expenses Paid by Cheque : Expenses Paid By Cash : Accounts Payable : Cash Discounts on Purchases : Petty Cash : Payroll : Sales & Customer Deposits : Accounts Receivable : Inventory : Deposits : Sale of Assets : Depreciation : Suspense : Month End Adjustments : Paper Trails

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This page last modified: 11 Mar 2008