Payroll Process Flow
Though some systems that incorporate more or less automation may not
include all of these steps, the following process flow will apply to most
payroll systems.
Step 1. Set Up New Employees
Have new employees fill out payroll-specific information as part of the
hiring process, such as the W-4 form and medical insurance forms that
may require payroll deductions. Set aside copies of this information in
order to include it in the next payroll.
Step 2. Collect Timecard Information
Salaried employees require no change in wages paid for each payroll, but
you must collect and summarize information about the hours worked by
non-exempt employees. This may involve having employees scan a badge
through a computerized time clock.
Step 3. Verify Timecard Information
Summarize the payroll information just collected and have supervisors
verify that employees have correctly recorded their time.
Step 4. Summarize Wages Due
Multiply the number of hours worked by the pay rate for each employee,
also factoring in any overtime or shift differentials.
Step 5. Enter Employee Changes
Employees may ask to have changes made to their paychecks, usually to
the taxes or pension amounts withheld. You may need to record much of
this prior to calculating taxes, since it impacts the amount of wages to
which taxes are applied.
Step 6. Calculate Taxes
Use IRS tax tables to determine the amount of taxes to be withheld from
employee gross pay.
Step 7. Calculate Wage Deductions
There may be a number of additional deductions to take away from
employee net income, including deductions for medical insurance, life
insurance, garnishments, and union dues. You must also track the goal
amounts for these deductions, so that you stop deducting once the goal
totals are reached.
Step 8. Deduct Manual Payments
If manual payments have already been made to employees, such as
advances, then deduct these amounts from the remaining net pay.
Step 9. Create a Payroll Register
Summarize the wage and deduction information for each employee in a
payroll register, which you can then summarize to also create a journal
entry to record the payroll. This document is automatically created by all
payroll software packages.
Step 10. Print Paychecks
Print employee paychecks using the information in the payroll register.
You normally itemize gross pay, deductions, and net pay in a remittance
advice that accompanies the paycheck.
Step 11. Pay by Direct Deposit
Notify your direct deposit processor of the amount of any direct deposit
payments, and issue remittance advices to employees for these
payments.
Step 12. Issue Paychecks
Have a paymaster issue paychecks to employees, requiring employee
identification if there are a large number of employees.
Step 13. Deposit Withheld Taxes
Deposit all withheld payroll taxes and employer-matched taxes at a bank
that is authorized to handle these transactions.
Example of Payroll Journal Entries
The primary journal entry for payroll is the summary-level entry that is
compiled from the payroll register, and which is recorded in either the
payroll journal or the general ledger. This entry usually includes debits for
the direct labor expense, salaries, and the company's portion of payroll
taxes. There will also be credits to a number of accounts, each one
detailing the liability for payroll taxes that have not been paid, as well as
for the amount of cash already paid to employees for their net pay. The
basic entry (assuming no further breakdown of debits by individual
department) is:
Debit Credit
Direct labor expense xxx
Salaries expense xxx
Payroll taxes expense xxx
Cash xxx
Federal withholding taxes payable xxx
Social security taxes payable xxx
Medicare taxes payable xxx
Federal unemployment taxes payable xxx
State withholding taxes payable xxx
State unemployment taxes payable xxx
Garnishments payable xxx
When you later pay the withheld taxes and company portion of payroll
taxes to the IRS, you then use the following entry to reduce the balance in
the cash account, and eliminate the balances in the liability accounts:
Debit Credit
Cash xxx
Federal withholding taxes payable xxx
Social security taxes payable xxx
Medicare taxes payable xxx
Federal unemployment taxes payable xxx
State withholding taxes payable xxx
State unemployment taxes payable xxx
Garnishments payable xxx
It is quite common to have some amount of unpaid wages at the end of an
accounting period, so you should accrue this expense (if it is material).
The accrual entry, as shown next, is simpler than the comprehensive
payroll entry already shown, because you typically clump all payroll taxes
into a single expense account and offsetting liability account. After
recording this entry, you reverse it at the beginning of the following
accounting period, and then record the actual payroll expense whenever
it occurs.
Debit Credit
Direct labor expense xxx
Salaries expense xxx
Accrued salaries and wages xxx
Accrued payroll taxes xxx
