If you have an accounting system and are using payroll, your entries should be in good order. However, 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.
Payroll includes:
- the wages themselves,
- the taxes you withhold,
- and taxes that you have to pay that you don't withhold.
Gross wages are debited to the wages expense account, divided between direct and indirect labor. (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.)
Payroll taxes come partly out of the employee's check - the federal withholding and the employee's share of FICA - and partly out of your pocket - the employer portion of FICA, state and federal unemployment taxes. 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 FICA payable, Fed payable, UI payable, FUTA 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 FICA and Medicare tax is 7.65% of gross wages, you take the gross wage, multiply it by .0765, and that is what you owe for the employer portion of FICA. The Internal Revenue Employer's Tax Guide provides specific information about the federal taxes employers must collect. Each state also has employment-related taxes that must be collected. Since these vary by state, check on what the laws are in your particular state.
All the taxes that are withheld from the employee's check, as well as those which come out of your pocket, are listed as liabilities. The taxes 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. The liabilities are simply money you owe, and it doesn't matter whether it comes out of the employee's check or out of you pocket. The FICA payable, for example, will contain all the FICA that was withheld from everyone's check, in addition to the amount that you are matching as the employer.
As a side note, that person, who you thought was costing you x dollars, because that is what their paycheck says, is actually costing you x dollars plus the payroll tax costs to you. If you're adding any benefits like insurance or retirement, those are an additional cost of that employee. When budgeting, you need to consider the real wages you are paying each person, not simply what their salary is.
