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Chapter 12

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Payroll Items

Payroll items are XE "Payroll Items"  the gears that make payroll run.  Each of the payroll items may be edited, but in many cases only to change the name or the account used.  Payroll items are completely separate and isolated from the business line items used in receivables and payables. 

Note well that several payroll items, including all the federal taxes, perform hard, dedicated functions. Their names can be changed but the operation is built in and cannot be changed.  The following payroll items cannot be deleted, nor can more items be added with these functions:

  • Sick Salary
  • Vacation Salary
  • Sick Hourly Rate
  • Vacation Hourly Rate
  • All Federal Taxes.
  • Yearly Salary (QuickBooks 3.1, 4, and Macintosh)

These types are available for new payroll items:

  • Yearly Salary (QuickBooks 5)
  • Hourly Wage
  • Deduction
  • Addition
  • Company Contribution
  • Commission
  • State Withholding Tax
  • State Disability Tax
  • State Unemployment Tax
  • Local Tax

Salary XE "Salary"  for the boss, and other salaried employees, is stated on an annual basis. QuickBooks 5 allows multiple salary items, with billing to multiple expense accounts, answering the urgent request of many users.  Earlier versions allow exactly one salary item, charging to one payroll expense account. The salary is set individually for each employee.

A class may be assigned to an employee in the employee record.  If class tracking by payroll item is selected, that class becomes the default for each item. (In the earlier versions, salaries charged to several expense accounts required some tricks to be used.)  The salary item may be set as a commission, as discussed below.  It may alternatively be set up (carefully) as an addition to gross pay.

Hourly wage items are next.  Two are provided as a starter, and more may be added.  The hourly items have no pre-defined significance.  The user must establish and follow the meaning of each hourly payroll item.  Again, rates are entered, within each employee record for each hourly item. In some states, it is desirable to set up items so that overtime pay XE "overtime pay"  is written up as two items.  One item is total hours, for all hours worked.  The other is the differential rate, showing only the overtime hours.

Commission XE "Commission"  is a common method of paying sales people.  The item includes a default amount or a percentage.  If the percentage is entered, it will appear when preparing pay checks.  A basis amount can be entered.  The actual commission will be calculated as the percentage times the basis amount. The employee record will also accept a fixed amount for commission.  See the NOTE in the employee template, below.

If a commission type item is used to pay a salary from an alternate payroll expense account, (in the earlier versions) it may be convenient to enter 1 in the rate column.  The salary can be entered in Preview Paycheck, as a quantity.

Tax withholding is more  XE "tax withholding"  XE "withholding tax" than familiar to all of us, and employers cant forget employer contributions.  Most federal taxes are locked items, with rates coming from the tax tables, and several of them come in by editing the employee record. Employer contributions are recorded as expenses, and both deductions and contributions are recorded in payroll liabilities.

Federal Withholding Tax XE "Federal Withholding Tax"  (FWH) is deducted from gross pay in accordance with Circular E (IRS Publication 15; or for farms, Circular A, IRS Publication 51) which provides several methods.  QuickBooks follows the first method described, percentage tables including the option to round to the nearest dollar.  XE "percentage tables"  Percentage tables are the obvious way for a computer but would be a nightmare for manual operation.  Therefore these publications provide the Wage Step Tables, which are universally used in hand payroll calculation  XE "Wage Step Tables" . For an amount in the center of each step the withholding will be the same as calculation by the percentage tables and rounding.  At the top or bottom of a step you can expect to see a small difference.

FICA and Medicare each have matching employer and employee contributions.  All numbers come from the tax tables.  Earnings are subject to FICA, up to a limit, which increases each year.  The IRS publications state that there is presently no limitation on wages subject to Medicare contributions. These items merely have to be turned on for each employee.  See Contributions subject to limits, below.

State withholding tax is set up with a new item of that type.  The details will be pulled from the tax tables.  (One-sixth of you will not even bother!)

State Disability Insurance and State Unemployment Insurance are in most cases set up with new items of those types.  Washington L&I  XE "labor and industries tax" needs a company contribution set up as Based on a quantity.  If a contribution is an insurance type not identified to individual workers, and with a complex fee structure, it may be better calculated as a separate expense, outside of payroll

Local withholding taxes can be set up for a short list of local situations.  If yours is on the list, payroll will handle it directly.  If not, it must be set up as a new deduction.

Additions to gross pay need care, in the application of taxes.  Any that represent an actual increase in employee compensation are taxable.  Each addition, however, may or may not be subject to all the various taxes, and an employer needs to know which taxes apply. Additions to net pay, which are rare, are not subject to taxes.  The check list can collect all the data that must go into this window.  See the NOTE under the employee template below.

Employee business expenses XE "Employee expenses"  are the most common addition.  Be aware that this has been a common gimmick for sneaking through un-taxed income, so it may be watched carefully.  Expenses the employee actually incurred, necessary for the benefit of the business, are usually reimbursable and not subject to tax.  The IRS publications have pages on this subject, containing information summarized from many decisions.

Employer contributions to retirement plans XE "retirement plans"  are often tax deferred, meaning they are not subject to withholding, but are probably subject to FICA and Medicare, and perhaps to state or local taxes.  The correct tax collection can be set up in the new item.  The tax rules regarding additions and deductions are too numerous and complicated to include here.  They must be tracked down for each item.

Payroll deductions XE "Payroll deductions"  are set up similarly to additions, and also require knowledge of how to calculate each tax before or after the deductions.  Retirement plan contributions may be federal tax deferred, but the other tax items have to be verified individually.  If a deduction is from net pay there are no taxes affected.

The 401 (k) contribution is a good example of a deduction requiring careful handling. These plans are usually sold by investment companies who should be able to supply the information needed to fill in Prior to calculating and W-2 Tracking.   Again, see the NOTE under the employee template below.

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Last modified: May 21, 2004