QuickBooks, by default, offers a single account called Payroll Expenses in your Chart of Accounts and all of the pre-programmed Payroll Items for wages and taxes are assigned to that one single account. When a business owner runs a Profit & Loss Report, when QuickBooks is set up in this manner, the report doesn’t really provide him with any real idea of how much he paid in wages vs. taxes because it’s all just lumped together in a single amount.
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I find this to be very frustrating because it means that you have to run additional reports and perform additional calculations in order to determine very basic information.
Previously, we covered creating a more functional Payroll Liabilities section on your Chart of Accounts, so that you could quickly and easily see not only the total of your payroll liabilities; but also the individual amounts that you owed for each specific payroll liability at a glance.
Today, we are going to discuss creating a more meaningful Payroll Expenses section, so that you can see how much you paid in wages vs. taxes; without having to run additional reports or perform additional calculations.
Before we begin to get to work, I will recommend that you contact your accountant or tax preparer before you start this process, they may want to help you to take this one step further – such as dividing wages and taxes between Cost of Goods Sold for your field workers and Payroll Expenses for your in-house office staff, which we are not going to cover in this post.
NOTE: Always make a backup of your QuickBooks file before making any changes to your file!
Step 1 – Determine What New Accounts to Create in Your Chart of Accounts
Start by looking at your current Payroll Item List {Lists menu –> Payroll Item List} to see how things are currently setup and to plan how you want to set up the Payroll Expenses section of your Chart of Accounts.
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From this list, we can see that we have Salary and Hourly Wage items, bonuses, Worker’s Compensation, and taxes – perhaps we want our Payroll Expenses section to contain Sub-Items for:
- Salary
- Wages
- Bonuses
- Vacation
- Sick
- Taxes
- Federal Unemployment {FUTA}
- Medicare Company {M-CARE}
- Social Security Company {FICA}
- State Unemployment {SUI}
- Employee Training Tax
- Workers Compensation
Step 2 – Create New Sub-Accounts of Payroll Expenses
The first thing we want to do is add Sub-Accounts to our Payroll Expenses section for Salary, Wages, Bonuses, Vacation, Sick, Taxes & Workers Compensation. To do this:
- from the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left corner –> choose New –> click into the radio button next to Expenses and then click the Continue button.
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- In the Account Name field, type in Salary
- Click into the box in front of Sub-account of, to select it, and then from the drop down list choose Payroll Expenses. Click the Save & New button.
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- Create sub-accounts for Wages, Bonuses, Vacation, Sick, Taxes & Workers Compensation.
Step 3 – Create Sub-Accounts for Taxes
Once you have the Sub-Account created for Taxes, next you create additional sub-accounts to track specific payroll taxes that your company pays; Federal Unemployment, Medicare, Social Security, State Unemployment, and Employee Training Tax. To do this:
- from the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left corner –> choose New –> click into the radio button next to Expenses and then click the Continue button.
- In the Account Name field, type in Federal Unemployment
- Click into the box in front of Subaccount of, to select it, and then from the drop down list choose the Taxes subaccount below Payroll Expenses.
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- Click the Save & New button
- Create accounts for Medicare, Social Security, State Unemployment, and Employee Training Tax.
- Click Save & Close when you finish creating the last account.
When you are finished, your Chart of Accounts Payroll Expenses section should look similar to the screenshot below:
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Step 4 – Map Existing Payroll Items to the New Payroll Expense accounts
Go back to your Payroll Item List {Lists menu –> Payroll Items List} and beginning with the first item in the list, edit it {usually double-clicking on the item will open the Edit window}, click the Next button until you reach the Expense Account window and then from the dropdown menu, select the correct Payroll Expenses sub-account. For example, I chose to edit the Salary – Designer item and then chose the Salary sub-account of Payroll Expenses. See the screen shot below.
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When you have finished, review the Expense Account column in the Payroll Item List to make sure that you have accurately assigned your payroll items to the proper sub-accounts. Do not skip this step!
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Your more detailed Profit & Loss Payroll Expenses section
Now when you run a Profit & Loss Report, you can easily see the details that make up your total payroll expenses without having to drill down or run additional reports and perform additional calculations.
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A note to accounting professionals. I realize that many of you don’t want to see all of the details that your clients may want and/or need to see when you run the same reports – don’t forget that QuickBooks provides a Collapse button at the top of the Profit & Loss as well as the Balance Sheet Report which allows you to see just the totals for the main or parent accounts in these reports.
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We hope that you find this post – and other related posts; to be helpful.
A QuickBooks Payroll Tip for creating a more functional Payroll Liabilities section on your Chart of Accounts.
QuickBooks, by default, provides a limited Payroll Chart of Accounts containing only two accounts – Payroll Liabilities and Payroll Expenses. When you run a Balance Sheet or a Profit & Loss Report (or look at your Chart of Accounts listing) you only see the totals with no details and have to run further reports to find the individual amounts that make up the totals. I find this to be problematic.
This article will show you how to add sub-accounts to the standard Payroll Liabilities account so that you can quickly and easily “see” the individual amounts for each payroll liability and how to edit your existing payroll items to accurately point to these new accounts. A little extra work up front will provide you with a very function Payroll Liabilities section on your Chart of Accounts.
Step 1 – Determine the required Payroll Liability Sub-Accounts
Open your Payroll Items List {Lists menu -> Payroll Items} and scroll to the bottom, and pay close attention to the items that are currently pointing to or assigned to Payroll Liabilities.
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NOTE: You may want to customize the columns that are displayed in this list. To do so, right-click the Liability Account heading -> choose customize columns -> from the available columns list click on Expense Account -> the Add button -> Liability Account -> the Add button -> Payable To -> and the Add button. Click Ok. This will provide you a more detailed and functional Payroll Item List to work with, as shown in the screenshot above.
From this list, we will determine what we need to add to our Chart of Accounts to make it more functional. We will be adding sub-accounts for:
- Federal Unemployment {FUTA}
- Federal Withholding {FWH}
- Medicare {M-CARE}
- Social Security {FICA}
- State Withholding {STWH}
- State Disability {SDI}
- State Unemployment {SUI}
- Employee Training Tax (ESD}
Step 2 – Create Payroll Liability Sub-Accounts
Once you have the list of items that we will be adding as sub-accounts to the main Payroll Liabilities account; go to your Chart of Accounts {Lists menu -> Chart of Accounts}.
- Click the Account button {at the lower left corner of this window} -> choose New -> click the radio button next to Other Account Types and from the drop down menu choose Other Current Liability -> click the Continue button
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- In the Account Name, type in Federal Unemployment -> click the box next to Subaccount of and then from the drop down menu choose Payroll Liabilities. Add other details as required or necessary.
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- Click the Save & New button to create the other items from your list.
NOTE: Create a single account for Social Security and Medicare.
Step 3 – Edit existing payroll items mapping them to the new accounts
Going back to your Payroll Item List, edit each item assigning them to the newly created sub-accounts.
- Click on the Federal Unemployment payroll item -> click the Payroll Item button -> choose Edit -> click the Next button -> from the Liability Account drop down menu -> choose Federal Unemployment
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- Click the Next button until you get to the last window then select Finish.
NOTE: You may receive an Update transactions with new account window, here you can choose to update all existing transactions OR update transactions starting on a specific date. My personal preference would be to update all existing transactions – you may want to consult your accountant about this.
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When you have finished mapping the items to your new sub-accounts; simply opening and viewing your Chart of Accounts will provide you with a detailed account of each of your payroll liabilities, as well as the grand total.
On Wednesday, we’ll provide instructions for making the Payroll Expenses section of your Chart of Accounts provide more information on Profit & Loss Reports.
Tracking employee advances or loans in QuickBooks on future paychecks is a must for those companies that has a policy that allows giving employees advances/loans for personal reasons.
There are three ways in which to record an employee advance or loan:
- Including it with the employees regular paycheck
- Writing a regular check
- Giving the employee cash from the company Petty Cash account
Step 1 – Create an Other Current Asset Account to track employee advances/loans
The first thing that you need to do – or have in place – is an Other Current Asset type account in your QuickBooks Chart of Accounts to track the money that is given to the employee.
If you need to create the account:
- From the Lists menu -> choose Chart of Accounts
- Click the Account button at the lower left -> choose New
- Click the radio button next to Other Account Types -> and from the drop down menu choose Other Current Asset -> click the Continue button
- Complete the details for the account -> Account Name = Employee Advances/Loans -> Account Description = To record employee advances or loans and repayments on future earnings.
Important Note: If your company frequently provides employees with advances on future earnings, create sub-accounts for each employee advance or loan; including the employee name and loan date in the account name.
Issuing an Advance or Loan to the employee as part of his or her regular paycheck.
If you want to provide the advance or loan money with the employee’s regular paycheck you will need to have in place or create an “Addition” type payroll item to record the money given to the employee.
If you currently don’t have an item in place, you will need to create one.
- From the Lists menu -> choose Payroll Item List
- Click the Payroll Item button at the lower left -> and choose New
- Choose Custom Setup -> and click Next
- Click the radio button next to Addition -> click the Next button
- In the Name field, enter the date, the employee’s name, and indicate if it is a loan or an advance. For example: 5/9/11 Mark Mason Advance. Click the Next button.
- On the Expense Account window, using the drop-down menu, choose the appropriate “Advance” account -> click the Next button
- On the Tax Tracking Type window, select None and click the Next button.
- On the Taxes window, there should be no check marks -> click the Next button
- On the Calculate based on quantity window, select Neither -> click the Next button
- On the Gross vs. Net window, select net pay -> click the Next button
- On the Default rate and Limit window, you can either leave both fields blank OR you can enter the full amount of the advance or loan in the first box -> click finish.
When you create the employee’s regular paycheck, from the Other Payroll Item box, select the “Addition” payroll item and enter the dollar amount.
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Providing an advance or loan by writing a check.
Create an entry for the employee in the Vendor Center or the Other Names List, use this newly created name when completing the QuickBooks Write Checks window and from the Expenses tab, select the appropriate Employee Advance/Loan account from your Chart of Accounts.
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Giving the employee cash from the company Petty Cash Account.
You’ll want to make sure that the employee’s name exists in either your Vendor Center or in the Other Names List.
Open your Petty Cash Account register, select the Vendor or Other Name entry, enter the dollar amount given to the employee and select the appropriate “Advance/Loan” listing in your Chart of Accounts.
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Repayment of employee advances can then be paid back to the company through payroll deductions, which is the subject of tomorrow’s Wednesday’s blog post.
QuickBooks Payroll, when properly set up, is capable of tracking and including the cost of your General Liability Insurance; as well as many of the other things that costly construction software does automatically – with a little more effort on your part and without the big price tag.
Tracking General Liability Insurance, when it is based on gross payroll, and getting those costs into Job Costing Reports is vital for many businesses, especially the construction industry.
NOTE: The best time to implement this procedure is when your General Liability Insurance Policy period starts.
The following instructions will allow you to track your General Liability Insurance costs when it is based on gross payroll and get those costs into your job costing reports without making complex journal entries. It will also help you be aware of how much your premium payment will be so that you aren’t in for an unwelcome surprise when the bill comes in or your policy is audited.
QuickBooks Setup for accruing the cost of General Liability Insurance
Example:
In our example general liability insurance is calculated at $6.36 per $1,000.00 in wages for field workers – realize that each type of work that you perform could very well have a different experience rate (just like Worker’s Comp).
Step 1:
Come up with a rate per $100 in wages so this can be calculated for each employee with each paycheck, if paychecks are usually less than $1,000.00 per employee per week.
- $1,000.00 divided by 10 = $100.00
- $6.36 divided by 10 = $0.636
If your policy has different experience rates for different work or employee classifications you’ll want to determine this cost for each different rate.
Step 2:
Create an Other Current Liability Account on your Chart of Accounts to track your Accrued General Liability Insurance. From the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left –> click New –> select the radio button next to Other Account Types and choose Other Current Liability from the drop down menu.
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Click the Continue button and add the details for the account.
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Click Save & Close.
Step 3:
Create the Cost of Good Sold and/or Overhead accounts to track the expense to the company. A Cost of Goods Sold account would be used for field workers and an Expense Account for Overhead and Office workers. From the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left –> click New –> select the radio button next to Other Account Types and choose Cost of Goods Sold from the drop down menu – OR – click the radio button next to Expense.
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Click Save & Close.
Step 4:
Create Company Contribution Payroll Items to track the costs while running payroll. From the Lists menu –> choose Payroll Item List –> click the Payroll Item button at the lower left –> choose New –> select Custom Setup –> click Next –> click Company Contribution –> click Next –> type in the name for this item and select the Track Expenses by Job option –> click Next –> choose your General Liability Insurance Carrier –> from the Liability Account drop down select the account you created in Step 2 –> from the Expense account drop down select the account you created in Step 3.
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Click Next –> Tax tracking type should be set to None –> click Next –> Taxes window should have no tax types checked –> click Next –> Calculate based on quantity window select the radio button to Calculate this item based on quantity –> click Next –> Default rate and limit window, enter the amount that you calculated in Step 1 and make sure that the This is an annual limit option is NOT checked. Click Finish.
Step 5:
Add the company contribution item(s) to Employee Defaults so all new employees who are hired will automatically have this item automatically included in their employee records.
From the Edit menu –> choose Preferences –> select Payroll & Employees –> click on the Company Preferences tab –> click the Employee Defaults button –> click into the Item Name column of the Additions, Deductions and Company Contribution section and select the item(s) you created in Step 4.
Step 6:
Add the company contribution item(s) to existing Employee Records in order to calculate your accrued liability when processing payroll.
From the Employee Center, edit each employee record going to the Payroll & Compensation tab –> click into the Item Name column of the Additions, Deductions and Company Contribution section and select the item(s) you created in Step 4.
Calculating General Liability Insurance Costs When Running Payroll
When running payroll you’ll want to open (view) the detail of each employees paycheck –> determine gross payroll ($280.00 + $1,120.00 = $1,400.00 – per the sample paycheck below) –> take total gross and divide it by 100 (1,400.00 divided by 100 = 14) –> enter 14 in the Quantity column next to the company contribution item and click Enter. QuickBooks will then calculate the General Liability Insurance for this employee and display that amount in the Company Summary section.
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By implementing and following this procedure your General Liability Insurance will be included in your Payroll Summary Reports, Profit & Loss, and Profit & Loss by Job Reports. Additionally, your accrued liability will be displayed on Balance Sheet Reports and can be viewed at any time simply by viewing your Chart of Accounts List.
One final note; when it’s time to pay your General Liability Insurance policy premium you will cut the check using the payroll Pay Liabilities function – DO NOT USE the Write Checks feature.
There are two possible ways to track retainage (retention) that you owe to your subcontractors; one method utilizes a Sub-Account of Accounts Payable, called Retainage Payable, and the other method utilizes an Other Liability Account, called Retainage Due to Subcontractors. Please review the setup and use of both methods, and choose whichever one seems more appropriate for your use.
You will need to inform your accountant of this at year end, so he or she, may make the necessary Journal Entries.
Method 1: Retainage as an Accounts Payable Sub-Account
Accountants tend to really like this method, but, it is a two-part process for the person actually doing the billing, which means that it’s error prone, simply due to normal day-to-day distractions.
From the Lists menu, choose Chart of Accounts
- From the Chart of Accounts window, click the Accounts button (lower left), and choose New
- Choose Accounts Payable as the Account type
- Enter an Account Number
- In the Name Box, enter Retainage/Retention Payable
- Click on the Subaccount of box, and choose Accounts Payable
- In the Description box, enter Retainage/Retention Payable on Contracts
- Click OK
Deducting Retainage/Retention Payable on a Vendor/Subcontractor Bill
If you have created a Purchase Order for this subcontractor and are now receiving his first progress billing, choose Vendors, and Receive Items with Bill, and if you have not created a Purchase Order, simply choose Enter Bill.
Select the Subcontractor from the drop down list; change the date, enter a Reference Number, the total amount of the bill, select terms, due date, and enter a memo if applicable – select either the Expenses or Item tab, and pull in the appropriate Item Code or Expense account associated with the vendor bill, and select the Customer: job. In the next blank line, again, pull in either the Item Code or Expense Account, enter the retention as a negative amount, in the memo field type in less retainage held, choose the Customer: job from the dropdown list.
Sample 1 below shows a sample bill created from a Purchase Order using the Item tab:
Sample 2 below shows a sample bill created using Enter Bills and the Expenses tab:
Recording Retainage Payable
Select Enter Bills; change A/P Account from Accounts Payable to Retainage/Retention Payable. Select your subcontractor; enter date of original subcontractor invoice, in the Ref. No., input the invoice number followed by, –R to indicate Retainage/Retention, enter amount due, change your terms to reflect when you will pay the retainage, select either the Item Code or the Expense account, and select the job.
Sample 1 shows a bill for retainage entered using the Items tab:
Sample 2 shows a bill for retainage entered using the Expenses tab:
Method 2: Retainage Payable as an Other Liability Account
This is a simple one-step process for the person actually doing the billing, and at the end of the year, the accountant will need to do a Journal entry to move the dollars for tax return purposes.
From the Lists menu, choose Chart of Accounts
- From the Chart of Accounts window, click the Accounts button (lower left), and choose New
- Choose Other Liability as the Account type
- Enter an Account Number
- In the Name Box, enter Subcontractor Retainage/Retention Payable
- In the Description box, enter Retainage Payable on Contracts
- Click OK
Setting up Items to Deduct Retainage Payable
- From the Lists menu, choose Item List
- From within the items List window, click the Item button (lower left), choose New
- In Type box, select Other Charge
- In the Item Name/Number box, type in 92 Less Sub Ret
- In the Description box, type in Less Subcontractor Retainage/Retention
- In the rate box, leave the amount set to 0 (you cannot use percentages in the detail of the bill) in the
- Account box, select the account used for Retainage Payable on Contracts
- Click OK to create the new item
NOTE: If you have different flat rates of retainage (retention) that you use, a separate item can be created for each of them using the rate in the Item Name|Number.
Deducting Retainage Payable on a Vendor/Subcontractor Bill
If you have created a Purchase Order for this subcontractor and are now receiving his first progress billing, choose Vendors and Receive Items with Bill, and if you have not created a Purchase Order, simply choose Enter Bill.
Select the Subcontractor from the drop down list; change the date, enter a Reference Number, the total amount of the bill, select terms, due date, and enter a memo if applicable – select either the Expenses or Item tab, and pull in the appropriate Item Code or Expense account associated with the vendor bill, and select the Customer: job.
Sample 1 shows a deduction for retainage using the Items tab:
Sample 2 shows a deduction for retainage using the Expenses tab:
While this is a much more simple process than Method 1, it will not reduce total expenses or Cost of Goods Sold, on a Profit and Loss Report. You will need to inform your accountant of this at year end, so he or she, may make the necessary Journal entries.
Recommendations:
Create a copy of your actual QuickBooks company data file and experiment with each of these methods to determine which is the right method for your company –and discuss this with your accountant so that they are aware of what you are doing!
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