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QBO How to manually record payment from a liability account

Forum|Forum|5 years ago
October 2, 2020
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We are a small non-profit organization. We use a 3rd party payroll, but bi-weekly they only pull from our checking the net pay and the direct deposit fees (NOT our employer contribution taxes). So I am manually entering a journal entry to:

debit the gross pay amount from payroll expenses:wages

credit the employee withheld deductions to the correct individual liability accounts

debit my employer contribution taxes from payroll expenses:taxes

credit employer contribution individual liability accounts.

This puts a positive balance in my liability accounts earmarking the funds for my quarterly IRS tax payment (assuming I'm doing this all correctly).

My question is this: In QBO, how do I then make a payment using the funds in the liability accounts? I've read some about creating a bill or a vendor credit and then paying the bill, but I'm not following exactly how to do that. If someone is willing to talk me through how to pay the tax bill from my checking account but using the earmarked liability account funds, I'd greatly appreciate it! I'm a newbie treasurer and figuring this all out as I go. If it matters, I'm using QBO Essentials.

QuickBooks Online

Best answer by Teri11_2

@MNSTreasurer -

I admire that you are trying to make things better for your employer and glad to help folks when I can see they are first making big effort themselves and know they can make big progress with just a bit of help.

You are correct. Payroll taxes should never be a surprise. Payroll taxes paid by employee and employer are 100% predictable based on employee wages since they are a pre-determined rate as % of gross pay.

Yes, much easier when you are not paying other benefits to employees to complicate payroll deductions.

First must critique organization you work for because Treasury for any entity should require experience, is not like jury duty where anyone s/b able to figure it out on a rotating basis so much risk on internal control.

Then you must know that COA (Chart of Accounts) is simply a LIST of Account Names and Numbers setup.

This is not any kind of a financial report to look at. QB is the only system that whatever reason happens to show account balances for Balance Sheet accounts only. I assume they would be correct but never used.

Sounds like what you want to do, intentionally or not, is to do accrual-basis accounting, where you record employee labor hours for the period x their hourly pay rate to compute gross pay for the pay period end. Since once you know those amounts you can compute the employee and employer payroll taxes today.

This is the other reason I suggest Gusto payroll because you can input those amounts today and see the total amount for payroll and taxes as soon as you have those employee hours and can say exactly how much money you need to pay for payroll in 10 days later. So much easier than computing manually!

My reason for saying that ties directly to the questions you are asking and would provide your answers.

Normally with a 3rd party payroll service, you receive a Payroll Journal, this is a standard report with the standard information needed to post your payroll entries into Quickbooks, if not electronically linked.

Looking at the entries you provided, cannot tell if they are correct unless we know the type of account,

which we can usually tell by the account numbers, so I suggest that before you attempt to correct entries

that you add proper account numbers so they make sense to you and me and others as well; simply add:

1000 Cash (Asset)

2200 Payroll Payable (Liability)

2300 Payroll Tax Payable EE/ER (Liability on Balance Sheet)

5000 Employee Labor Cost (Expense on Income Statement)

6400 Payroll Tax Expense ER Paid (Expense on IS)

------------------------------------------------------------------------------------------------------------------------------------------------

To keep simple, say you have two employees. Each paid $10/hour and each worked 40 hours in week.

So $400 each x 2 = $800 Gross pay, right?

09.30.20 Record employee labor from timesheets ideally. Hours worked x hourly pay rate = Gross pay.

-Debit 5000 $800

-Credit 2200 $800

Amount includes employee paid payroll taxes so you can choose to split out but not needed. I don't.

9.30.20 Record employer-paid payroll tax based on labor dollars. See rates on attached cheat sheet.

-Debit 6400 for 7.65% of gross pay

-Credit 2300 for 7.65% of gross pay

10.10.20 Record payroll cash paid to employees as net pay and paid to payroll tax agencies.

-Debit 2200 for EE Net pay

-Debit 2200 for EE paid taxes

-Debit 2300 for ER paid payroll taxes

-Credit 1000 Cash for Total Paid in 3 lines above

These amounts vary slightly in Q1 when you also pay FUTA & SUI and go down if EE pay is over limit.

As they always say, you should discuss with accountant, but this is what I do, so hope it helps.

This is also what my 90 clients do.

Definitely never do this as you noted at bottom of your post:

do the fund get pulled from the checking when you credit them to the liability account, so you need to put them back or credit them back to the checking when making the real payment?

I hope questions make sense and I'm not going in circles.
Thanks so much for any clarification!

T

Teri11_2

My first thought is why pay for 3rd party payroll service and not have them handle the payroll taxes for you? Since that is one of the primary reasons for using 3rd party payroll service. I suggest check out Gusto payroll.

Super easy to use, they convert for you, employees have access to paystubs, W-2's, 1099's, all is self-service. I have used for my company since 2015 and have over 20 clients using now, leaving ADP, QB, Paychex, etc.

Anyway, to sort out what you have going now... you said this:

"This puts a positive balance in my liability accounts earmarking the funds for my quarterly IRS tax payment (assuming I'm doing this all correctly)."

The liability account should have a credit balance at this point, so the payment clears account to zero out.

Since you mentioned "positive" balance above, want to confirm you have credit vs. debit balance liability.

Payment entry ultimately needs to debit Payroll tax liability account and credit Cash (Bank account).

M

MNSTreasurerAuthor

Teri - I have only been Treasurer (a position that in our organization changes hands frequently, sometimes with a stretch as short as a 1 year position) for only a few months. I am working on improvements which include upgrading to QBO this year. This is how things have been done with payroll for years, and it's what I inherited. The payroll company does "handle" our taxes as in files forms, tells us what to pay when, etc. Up until now the Treasurer has only been recording the net pay + direct deposit fees leaving our bank account bi-weekly and then paying the federal taxes expense amount (as told to them by our payroll company) quarterly and state/county annually, but they never tracked withholding or employer contribution taxes with payroll, so the tax bill was always a "surprise" amount. I want to keep better records of how much we're actually spending on our employee payroll costs as they happen so we can anticipate the taxes when they are due as well as have a more accurate picture of how much each employee truly costs us to employ. We don't have insurance or other benefits which simplifies things for us, but I'd like to improve accuracy in our books.

I am recording my journal entry as shown below:

(Debit) Payroll Expenses: Wages

(Credit) All Employee withheld taxes (Federal withheld, Medicare, Social Security)

(Credit) State/County Taxes

(Credit) Checking Acct - Net Pay

(Debit) Payroll Expenses: Taxes (for the employer contribution portion)

(Credit) Employer paid Federal (Medicare, Social Security)

(Debit) Bank Fee: Direct Deposit Fee

(Credit) Checking Acct - Direct Deposit Fee

When I enter it this way, my chart of account shows a positive amount ($200 for example, not -$200) in my liability accounts, as I understand it should be because I have not actually paid any taxes.

What I want to be sure of it that I am entering the expense correctly when I do pay the taxes from our checking account. For simplicity, let me dumb this down. Suppose I owe $200 to the IRS, if I make a new expense, making Payee: IRS, Payment account: Checking, Category: Liability Account (which I would break down between the correct liabilities), Amount: $200 --- is this the correct way to make that payment for taxes to take funds from the liability account?

I don't have an accounting background, and in reading, I'm getting confused about "crediting" the checking account when making a payment. (I feel like you should Debit the checking account if you're taking money out of it, but based on the journal entry I'm using for payroll entry, that must not be so. I might need a crash course in double entry accounting to fully understand what is happening.) In quickbooks do the fund get pulled from the checking when you credit them to the liability account, so you need to put them back or credit them back to the checking when making the real payment?

I hope questions make sense and I'm not going in circles.

Thanks so much for any clarification!

T

Teri11_2Answer