Accounting is a critical part of every business, but have you heard of payroll accounting? As the name suggests, this narrow focus of accounting focuses on everything to do with payroll, not just salaries and wages, but benefit costs and payroll taxes too. A huge benefit of payroll accounting is a better understanding of the cost of each employee, which is the key to smart business growth. Whatever industry your company is in, the best accounting software and leading payroll services can improve your understanding of payroll accounting and its impact on your bottom line.
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Payroll accounting is a system of tracking business expenses related to payroll. This includes individual employee compensation as well as payroll taxes, employer portions of federal benefit withholdings, employee benefit payments and other deductions. Payroll accounting ensures you not only keep careful track of your payroll expenses, but also comply with local, state and federal employment laws and don’t run afoul of any tax rules.
Without payroll accounting, you can’t get an accurate view of the total cost of your employees. That makes it difficult to understand the incremental cost of each additional employee you hire and challenging to decide whether to hire full-time employees, contractors or part-time hourly workers when you need to add to your workforce.
Payroll accounting is very different from other types of accounting, such as financial and managerial. Like financial accounting, payroll accounting involves recording and categorizing company transactions, but it focuses exclusively on employee-related expenses. Unlike managerial accounting, payroll accounting requires no complex analysis on which to base business decisions.
Payroll accounting is an accounting process that focuses only on the expenses related to employees, including salaries and wages, payroll taxes, the costs of benefits, and paid time off.
When doing payroll accounting, you’ll consider the following personnel-related expenses:
What it is
Salary, commissions, tips
Federal, state or local taxes paid on employee wages
Employer portions of Medicare and Social Security payments for employees
Employee benefit payments
401(k) match payments, health insurance premiums and other costs of offering benefits
Tuition reimbursement, child care and other fringe benefits
While payroll processing software automatically deducts employees’ portions of their benefit payments from their paychecks, payroll accounting doesn’t include these payments because the business isn’t paying them. Rather, these payments are discretionary for employees and come directly out of employee funds.
Payroll accounting also doesn’t include rent, utilities, office supplies, inventory or any other business expenses that aren’t related to employee compensation or benefits, nor does it relate to taxes other than payroll taxes and FICA payments. Sales, excise and company income taxes, for example, are all excluded from payroll accounting records.
Payroll accounting can seem complicated, but accounting software makes it a lot easier. It’s critical to set up your payroll accounting process properly in order to get an accurate picture of your payroll expenses and to ensure compliance with labor and tax laws.
Here are the six steps to set up and conduct payroll accounting for your small business:
In addition to these routine functions, payroll accounting can help with a lot of other accounting processes, including financial accounting. This allows you to get a more detailed look at your employee-related expenses. You can also run reports that break down your expenses by category and make it easier to prepare tax filings and other forms.
Accounting software is a critical tool for small businesses, and it’s especially helpful for administering and tracking employee payroll. With the right accounting software, you can process individual payments, set up automatic payments or integrate with third-party payroll providers. You can also get a better idea of the total cost of your employees by tagging expenses and running detailed reports.
Here are some tasks you can accomplish with accounting software that helps with payroll:
While accounting software has many benefits – especially for payroll accounting – it doesn’t do everything. Most importantly, while accounting software can give you a big leg up when you’re preparing tax forms for your small business, most accounting software doesn’t have features for automatic preparation or submission of tax filings. For that, you may need to use separate software or an online portal offered by your local taxing authorities. Most payroll services, however, are capable of filing your payroll taxes for you.
Accounting software and payroll software often tightly integrate since most businesses’ biggest expense is labor costs. Use these integrations to streamline payroll operations and reduce inconsistencies in your financial records.
Among our picks for the best accounting software, we recommend the below platforms for payroll accounting:
Accounting software reports on your payroll but may not actually process it; that’s where payroll services often come into play. Below are some of the best payroll services that integrate seamlessly with accounting software for powerful reporting and reliable employee payments:
Understanding the cost of an employee is nearly impossible without accurate payroll accounting records. Whether you run payroll in-house or outsource to a payroll service, be sure to closely integrate your payroll operations with your accounting software. This not only paints a clearer picture of how much each employee costs your company, but also helps you plan the expansion of the business and determine when to bring on new hires. Smart business owners keep close tabs on every penny coming in and going out, especially considering the largest expense: your people.
Max Freedman contributed to this article.