The payroll department is responsible for sending payments to all employees of an organization. Payroll accountants ensure that records are filed correctly and financial operations are being carried out smoothly within the company. The work that they do is crucial to making sure that employees receive proper earnings for completed work.
In today’s blog, we’ll talk about payroll accounting in-depth, the things involved, and some examples of it. We’ll also outline how to start payroll accounting and how engaging in accounting services can help businesses.
In accounting, payroll refers to the process of filing and tracking employee compensation data. This includes the benefits the employee receives and the money withheld from each paycheck and taxes. To handle this process, accountants use financial journal entries that allow them to summarize an organisation’s total cash flow and transactions.
To the uninitiated, there may be questions on whether or not payroll entries fall under the scope of a general ledger, of which the answer is yes. Human resources staff can pull all payroll information documented on an employee and send it to the higher-ups for employee performance evaluation. Let’s take a look at the different examples of payroll accounting below.
To ensure payroll is correctly recorded, companies can conduct entries in three separate ways: initial recordings, accrued wages, and manual payments.
- Initial Recordings – These are the standard method of entering payroll data and only apply to employees’ wages, taxes, and withholdings (not the company’s).
- Accrued Wages – Accrued wages are entries at the end of a company’s accounting period, either quarter or annually. It’ll all depend on the size of the company. The amount of urgency that external stakeholders have to review financial information is also another factor to consider.
- Manual Payments – Manual payments happen only when an employer needs to send a check to its employee directly to their home address. Issuing a check may be warranted to account for the change if an employee’s pay needs to be adjusted.
To accurately insert relevant information into the ledger, payroll accountants need to employ their hard skills. From expenses and liabilities to assets, everything must be recorded for financial and compliance purposes. For your guidance, here’s what’s included in payroll accounting:
- Employee fringe benefits’ expenses
- Gross wages, salaries, bonuses, and commissions
- Withholding taxes (both employer and employee)
- Withholding of salary, insurance premiums, savings plans
The cost of an employer to administer health and dental benefits, retirement and worker’s compensation (if needed), and paid holidays—payroll accountants must include this information. This helps an organisation budget and find out if they can expand the benefits offered to their employees.
Businesses should account for all earnings that their employees made during the fiscal year. From the annual salary, overtime pay (if applicable), and additional wages—this information must be included as well. Accountants confirm which employees received commissions on deals they closed for the company.
For tax figures withheld from an employee’s salary, they must be recorded separately. Some examples of withholding taxes include Medicare taxes, income taxes, and social security taxes, among others.
Other than tax purposes, an employer also withholds an employee’s part of healthcare premiums, retirement savings, or contributions to non-profit organizations. This allows an organisation to segment how pieces of the employees’ salaries are withheld for tax purposes and employee contributions.
For start-ups and small to medium-sized businesses, here are a few helpful steps to get started on tracking payroll:
- Sort primary items
When starting a business, you have to decide how you’ll compensate your employees. The compensation you offer, the effort required to perform tasks, and projects assigned by the manager—all these things can determine how long an employee stays in your company.
- Determine paperwork
Once the payroll process is in order, you have to compile all forms you need your employees to submit.
- Calculate the payments
Having a centralised software system can go a long way in calculating payments. Start-ups and small to medium-sized businesses can benefit from investing in a software system or hiring payroll services.
- Document payroll information
It’s also important to document all of the company’s financial transactions. This makes it easier to directly account for the expenses and liabilities of the company.
- File taxes
All businesses in the UK have to file taxes. This is why all documents should be kept in the case of an audit.
Here are other terms to remember for start-ups and small to medium-sized businesses:
Under the UK law, employees have extensive rights. There is a mutuality of obligation for people considered as employees if the employer has control over the work. As per the employment law, workers are defined as the people obligated to perform services personally and don’t carry on a business.
Some self-employed individuals are obligated to perform services but do so as a business. However, they have few rights under the employment law.
Apart from the National Minimum Wage, payroll in the UK also has a National Living Wage for employees aged 25 and over. The rate depends on the employee’s age and is set to change every April.
Employees in the UK can’t work more than 48 hours a week on average. A typical working day is 9:00 am-5:00 pm, usually around eight hours long. However, this can vary depending on the nature of the job.
If you’re a start-up or a small business owner, ensure that your business is compliant with regulations by working with qualified accountants. Here at CJ Accountancy Services, we provide payroll services to help you document records for employee compensation as you focus more on the growth of your business. Get in touch with CJ Accountancy Services to get started.