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Chapter 11

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Chapter 11

Payroll in a Computer

The most important facts about payroll XE "payroll:discussion"  relate to where the money is going.  Most of it goes to employees, a matter which is regulated by law. Reading between the lines of the laws on this subject, it is apparent that there are many more employees voting than business owners, because the laws favor protecting employees. Another segment of payroll expenses go to governments, to the people who make and enforce the laws.  Ignorance of the law is no excuse.  Anybody handling payroll has every reason to know and obey all related laws.

Workings of Payroll

A payroll program first calculates an employees earnings for the period.  Most earning bases fall under hourly, salaried, or commission.  The earnings of some employees will be the sum of different methods of calculating pay.  The description here will focus on typical employee payroll, with special cases being discussed later.

Pay Periods are the time intervals at which pay is calculated and paid.  QuickBooks provides the usual pay periods.  Note that bi-weekly means twenty-six pay periods XE "pay periods:defined"  in the year, and semi-monthly sets up twenty-four pay periods in a year.

Hourly employees XE "hourly employees:defined" work a counted number of hours during the pay period.  The hours may be worked at different rates.  Payroll must multiply each hourly rate times the hours worked at that rate, and come up with earnings at each rate.  These earnings amounts are added for total (hourly) earnings. The program has no fixed meaning for any hourly rate.  The user must define and track the meanings of each hourly rate.

Salary may be based on a month or week or other interval, whatever is agreed between employer and employee. Within the QuickBooks pay systems, salary XE "salary:defined"  means annual salary.  In calculating pay, QuickBooks divides the salary by the number of pay periods during the year.  Salaries are often stated in other terms, such as per week or per month.  These firgures must be multiplied by an appropriate number, and entered as annual salary.

Commission is a common basis for paying sales people.  QuickBooks payroll accepts any commission XE "commission:defined"  rate from 0% to 100%.  In generating a paycheck, basis dollars are multiplied by commission rate, and the product is added to gross earnings. .

Piece rate refers to paying people for the number of articles finished, but QuickBooks has no direct provision for piece rate XE "piece rate:defined"  payment. An hourly basis can be used.

Gross pay will be the sum of all of the above, plus any items defined as additions to gross pay XE "gross pay:defined" , and before any deductions. Giving all this money to an employee would seem gross, so money is taken out as deductions.

Withholding tax, or advance payment of federal income tax, is calculated on the gross pay of every one in the fifty states, the District of Columbia, and Puerto Rico.  (QuickBooks handles DC and PR as states.)  For a few, withholding is zero, but it is a deduction for the rest of us.  And one-sixth of you are feeling smug about living in states with no income tax.  The other forty-two states have state income tax and withholding tax XE "withholding tax:defined" .  The amounts of these items, and the next two, are determined in QuickBooks by the tax tables.

FICA (Social Security) and Medicare payments come out next.  And for every cent of employee contribution, there is one cent of employer contribution.  All earned income is subject to Medicare XE "Medicare"  XE "Social Security" .  A ceiling applies to FICA XE "FICA" , and it increases each year. 

Retirement plans generally affect gross income.  Plans such as 401(k), 403(b) and SEP are tax deferred.  The general idea is that tax will be collected after retirement XE "retirement" , when the employee actually receives the money as spendable income.  Most states also allow tax deferral on retirement contributions. But FICA and Medicare must be paid on all gross earnings, up to the FICA limit.  The payroll programs are flexible on this subject.  They will accept a variety of instructions about taxability of any pay item.  In other words, you must know the rules and take charge.  The details will be spelled out when we get there.

Deductions generally mean  XE "deductions" that the employer is holding money in trust, for a government or for some benefit of the employee.  In nearly all cases, the deductions should go to a liability account.  Although these funds are in the employers possession, business managers should take care not to use this money for working capital.  The government thinks it should be paid on time, and is quite prepared to impose penalties.  Others, such as HMOs may not have that level of clout, but may consider late payments in quoting next years rates.

The term deductions may sometimes be used broadly or loosely.  For example, unemployment insurance is usually an employer contribution, but the calculation is exactly as for deductions, so SUI may be called a deduction.

Employer contributions likewise will usually go into a liability account, as money held in trust.  In most cases, employer contributions XE "employer contributions"  will go through the pay check generation process.  In a few cases, reasons exist for making them separate.  The payroll system handles them as a general journal entry, viewable only through the pay check screens.

Unemployment insurance XE "Unemployment insurance"  is generally a company contribution, with rates set by the state, and paid to a state agency.  The QuickBooks payroll systems facilitate entering SUI, but cant derive rates from the tax tables, because they are often set individually according to employer experience.

FUTA XE "FUTA" , or Federal unemployment insurance XE "unemployment insurance"  is also a company contribution.  Rates come from the tax tables, but are often subject to a credit for payment of SUI, determined locally.

Employee business expenses are usually added to net pay, or paid separately from payroll.  This is correct only for expenses XE "expenses:employee"  where the employee records and then turns in claims for money actually spent, on behalf of the company.  The rules include actual automobile mileage driven for the benefit of the company, priced at or below the limits stated in current IRS publications. As employers and employees have tried to be more clever at using employee expenses as a tax dodge, the rules have become very complicated.  Any driving or actual expenditures, which are genuinely necessary for the employee to perform his or her duties, may be reimbursed.  The IRS publications contain several pages on this subject, summarizing the results of many rulings.

Employee advances are deducted from net pay.  Net pay is the money the employee actually should and does receive.  An advance XE "advance:on pay"  merely means she has received it before payday.

The payroll system handles all of the above. The pay check is created, and the liabilities are recorded, each identified to the employee.

Payroll Liabilities , obviously, must be paid off.  Payments of federal withholding, FICA, Medicare, and FUTA are made by deposits each month (or oftener) into a bank, with exceptions allowing quarterly deposits where the total is less than $500 in one quarter. The included payroll system wants to make the liability payments its way, and you are well advised to go along. All payroll liabilities are recorded in one account, and identified by  individual payroll item names.

Generalconcepts having been described, lets get to the realities of handling payroll in QuickBooks.  Perspective can be gained by comparing the size of the next two chapters.  Chapter 12 tells how to set up payroll.  It is about three times the size of Chapter 13, which describes running payroll  and reporting on payroll.  Lets get at it.

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Last modified: May 21, 2004