We are going to enter the payroll accounting entries for one employee with appropriate deductions for federal and state income tax and FICA tax:
- We have created a spreadsheet of the calculations that we are going to use in making the payroll entries. Take a moment to study the following screenshot:
- Create the expense accounts: You need two expense accounts one Payroll Expenses for gross pay and another Employer FICA Tax for the company contribution to FICA tax.
- Create the liability accounts: The tax amounts deducted from the employee's gross pay are owed to the appropriate government agencies. We need to create liability accounts to hold these amounts until they are due. Go ahead and create three accounts, Federal Income Tax, VA Income Tax, and FICA Tax of Account Type Liability with Liabilities as the Parent Account as shown in the following screenshot:
Monthly salaried employees are typically hired with a gross pay. However, when it comes to making payment, there will be several deductions. When you record payroll in GnuCash, it is done with a single split transaction. This split transaction will populate the appropriate expense and liability accounts. If you want to look up any of the payroll details for a particular employee, at any time, you can simply open and view the split transaction.
For example, most employees in the US will typically have the following deductions:
- Federal income tax
- State income tax
- FICA tax
There will be other deductions such as county or local taxes, separate deductions for health, dental, and vision insurance, 401(k) or other retirement plan contributions and so on. The net pay thus calculated becomes payable to the employee and it becomes an expense to the business.
The business owes these deducted amounts to the respective tax authorities. In addition, the bookkeeping system must keep track of company contribution to social security tax, Medicare tax, health insurance, 401(k), and so on. These are also employee-related expenses to the business. However, these payments are not made at the same time as the payroll. So, these amounts must be accumulated in respective liability accounts so that the correct amounts can be paid, when they become due.
As we said, GnuCash doesn't have an integrated payroll module. Any calculation of deductions and company contributions must be made outside of GnuCash. This is the reason why we used a payroll calculation spreadsheet in the above tutorial. The spreadsheet can have all the formulas and lookup tables set up so that you can enter the gross salary in one cell and get all the computed values ready to be posted into GnuCash.
The following split transaction map covers just the three taxes listed previously, of which the federal and state income taxes are entirely payable by the employee, while the FICA tax has an employee contribution and an equal company contribution.
|
Account |
Increase |
Decrease |
|---|---|---|
|
CurrentAssets:Checking |
Net Salary | |
|
Expenses:Salaries |
Gross Salary | |
|
Liabilities:Federal Income Tax |
Federal Income Tax | |
|
Liabilities:VA Income Tax |
VA Income Tax | |
|
Liabilities:FICA Tax |
Employee FICA Tax | |
|
Expenses:FICA Tax |
Company FICA Tax | |
|
Liabilities:FICA Tax |
Company FICA Tax |
Here is a list of frequently asked questions about the payroll process and our answers:
- Q: If I use a single Payroll account for all employees, how will I see per employee information?
- A: Use reports to view information for each employee.
- Q: I have a number of employees. Creating this complex payroll entry seems to be a lot of work.
- A: If you are thinking, "Oh boy, am I going to be doing all of that for each payroll period for each employee?" Relax. If you recall, we covered the Duplicate Transaction feature in the section A feeling of déjà vu in Chapter 2, Transactions the Lifeblood of a Business. Each time you need to create a new transaction, you can take the payroll transaction you created and duplicate it. Then you can change the description and amounts and save it.
- Q: How do I print payroll checks?
- A: When making the Payroll entry, enter only the employee name in the Description field. If you decide to use GnuCash's check printing capabilities, the check will automatically be made out to the employee name correctly. If you want to record other information in the transaction besides the employee name, use the Notes field. You can view this Notes field in the account register in double-line mode as explained in Chapter 2, Transactions the Lifeblood of a Business; in the Changing the register views section.
When employees spend their own money on behalf of the business, or they draw a cash advance from the business and need to account for expenses incurred, or they use a company card for business expenses, they need to submit an expense voucher to account for the amounts.
Under the Business menu you will find the Employee menu item with the Employee, Expense Voucher, and Process Payment modules.
You will find that these modules follow the same process as we covered in detail under Customer Invoices and Vendor Bills. You can follow the same process for Expense Vouchers as we followed for Invoices in the Invoices and Accounts Receivable section of Chapter 6, Business Mantra: Buy Now, Pay Later.
- At the time of paying an employee, the amount deducted from gross pay towards employee's contribution to FICA Tax will be accounted as:
a. An expense
b. A liability of the business to be paid to the government later
c. An asset of the company
d. A liability of the employee to be paid to the government later
- The Federal Income Tax account to hold the amount deducted from employees' salary will be of what Account Type and with what Parent Account:
a. Account Type "Asset" and Parent Account "Assets".
b. Account Type "Liability" and Parent Account "Liabilities".
c. Account Type "Expense" and Parent Account "Expenses".
d. Account Type "Income" and Parent Account "Income".