Are you a business with a number of employees? Congratulations on reaching this milestone! As you are on the exciting path of increasing your staff and business, it has now become critical that you set up a payroll accounting system that is dependable and effective.
Let's start with the basics before, we delve into payroll accounting setup and calculations.
What is Payroll Accounting?
Payroll accounting is the process of managing and recording financial transactions related to employee compensation within an organization. It involves calculating and tracking wages, salaries, bonuses, deductions, and taxes for each employee. It is greatly influenced by the legal requirements of each country and may also be influenced by state or local city requirements.
Objective of Payroll Accounting
Before diving into the nitty-gritty details, let's take a moment to understand the importance of payroll accounting.
Beyond its obvious function of compensating your hardworking employees, payroll accounting plays a pivotal role in maintaining accurate financial records, complying with legal requirements, and fostering employee satisfaction. By setting up an effective payroll system, you not only streamline your operations but also build trust and confidence among your workforce.
To begin, it's crucial to familiarize yourself with the labor laws, tax regulations, and reporting requirements specific to your jurisdiction. Employment legislation can vary, and staying informed will help you navigate the complex landscape of payroll compliance.
Payroll accounting encompasses various tasks to uplift the company's payroll, including:
- Recording Employee Information
- Wage Calculation
- Deductions and Withholdings
- Tax Compliance
- Employee Benefits
Major Costs Involved in Payroll Accounting
Payroll costs are associated with obligations assumed by an employer to fund payments paid to employees for direct labor or as a result of mandatory benefits.
The total of these concepts is the accrued expense for keeping an employee on the payroll. According to accounting principles, all accrued expenses must comply with the principle of matching, which means that all expenses must match in the period when all related income is reported.
For example, if an employee is hired on the first of October but paid the first week of November, expenses related to the employee's labor must be recognized in October.
Note-Employee labor compensation should be recorded as the cost of producing the product or asset and recognized as an expense when the inventory is sold at the cost of sales. For example, if employees' labor is used to manufacture a product or asset, their pay should be recorded as the cost of manufacturing and recognized as an expense when the inventory is offered for sale.
Setting up the Payroll Accounting process
Every Employer must meet certain requirements before beginning the hiring payroll process in the payroll system. Read on to know the requirements:
1. Get Tax Identification Number
To set up payroll, you must first obtain a Tax Identification Number from the concerned tax authority of the country. For payroll and tax purposes, these unique numbers are used to determine the type of business.
2. Set up Payroll Accounting Software
Set up a reliable payroll software or system that can handle the complexity of payroll calculations, tax withholdings, and statutory deductions.
3. Obtaining employee information
Companies can begin the hiring process once all of these criteria have been met. Employers must collect the following details regarding each employee when hiring them: SS number, Date of birth, Location, and Phone number
4. Payment type and frequency
The payment type specifies how the payroll will be distributed, which could be weekly, biweekly, or monthly. Payroll is processed regularly, for instance, every two weeks or once a month, during the pay period.
5. Account for Taxes, benefits and Deductions
Now, determine the proper tax withholdings in accordance with current tax rules and regulations. Deduct any mandatory social security, health insurance payments, retirement contributions, or other statutory deductions.
5. Employee benefits
If an employer provides additional benefits such as insurance or a 401K retirement plan, they must decide how much to contribute as an employer and how much the employee must bear to receive the benefit.
Payroll accounting software for efficient payroll processing
Payroll accounting setup software can virtually eliminate payroll errors by replacing the time-consuming and inaccurate manual payroll process. Payroll is computed based on hours worked and after withholding taxes and deductions using cloud-based software. Employees can use the software to enter direct deposit information and receive their net pay straight into their bank accounts. Payroll accountants can create employee profiles and allow employees access to their salaries and benefits, as well as provide employee self-service.
If your business needs to implement proper payroll accounting without disturbing your business's core activity, you must consider outsourcing your Payroll accounting to any reliable payroll service providers who are good at accounting and bookkeeping like BMS Auditing.
Payroll Accounting Calculations
Following the setting up of the company and the gathering of all employee payroll details, the following steps must be taken:
1. Calculate labor compensation: At the end of each month, total all direct compensation costs, such as salaries and overtime.
2. Then, add up indirect concepts like commissions and bonuses.
3. Calculate deductions: After determining the basis for each deduction in the previous phase, calculate your employees' taxes and wage deductions to comply with the applicable requirements.
4. Provisions: Provisions are accrued expenses that result in future liabilities that must be paid. Legal expenses such as vacations and holidays are recognized as provisions in the month in which they are incurred, even though they are paid later. They are the result of the agreement between the company and the employee.
5. Post entries in the books of records
Generate payments: Following the calculation and registration of accounting entries, businesses need to make payments to employees, government entities, and other entities. This process is frequently outsourced to third parties.
6. Calculate provisional adjustments: Because provisions are based on estimates, you must recalculate and adjust provisions as needed.
The Difficulties of Manual Payroll Management
Physical bookkeeping and manual processes are significant barriers to effective salary disbursement and payroll management. Manual payroll processing results in data entry errors, and physical cash payments results in malpractice and leakage.
Bottlenecks in payroll accounting and disbursement
- Physical documentation is extensive.
- Maintaining records in Excel sheets is difficult.
- Keeping track of the workforce's frequent changes
- Arduous tasks that result in data entry errors
- Insufficient fund transparency
- Susceptibility to privacy violations
- Risks of noncompliance
Outsource Payroll Accounting
Remember that you must file your company's taxes quarterly and annually. It's necessary to consult with an accountant to make sure you understand how payroll taxes corresponded to this aspect of your business. You must also notify the government of any new multiple hires. This is usually not your responsibility if you use a payroll solution or an accountant.
BMS Auditing offers invaluable assistance in accurately calculating payroll accounting, ensuring compliance, and optimizing financial processes for seamless payroll management. understanding the complexities of Payroll, we offer outsourced payroll accounting services to simplify and streamline your payroll processes.
Our dedicated team of payroll specialists ensures accurate and timely payment of salaries, bonuses, and deductions. We stay up-to-date with tax and employment regulations, ensuring compliance and relieving you of the burden of payroll administration.