Springbrook Express (SBX) is a cash basis accounting system but mimics many useful functions found in GAAP compliant accounting systems. One of these useful features is the Payroll Liability account.
The function of the Payroll Liability account is to recognize payroll liabilities (expenses) incurred when an employee receives a paycheck. Only items that are classified as “Employee” deductions, benefits and deductions the employee is paying for, like the employees share of medical expenses, the employees share of Social Security and Medicare. These are expenses taken out of the employee's paycheck and then paid to IRS, L&I, PFML, Medical Insurance, etc. These deductions are sent to the Payroll Liability account! In a cash basis system, the Employer portion of payroll expenses is not created until the Benefit AP’s have been posted to the Accounts Payable module and then posted to the GL. Yet when the Employee’s check is created it must be created net of taxes and Employee Deductions. So how do we solve the dilemma?
We end up using a “middleman” or Liability account. The Payroll Liability Account.
Example:
Let’s assume that an Employee is paid $5,000 in gross salary. Benefits like healthcare and retirement cost another $2,500. The Employee’s portion of the benefits is $1,000, and the Employer will pay the other $1,500. The total cost of payroll is $6,000. When the employee is paid, here’s what happens:
Salary BARS code, e.g. 512.52.10.0001 = $5,000
Payroll Liability Account Code , most likely a 589.99.00.0000 BARS code = ($1,000)
Net Check = $4,000.
The full amount of the wages is written to the BARS at the time the paycheck is written.
Basically, our payroll expense for the employee is $5000. This is what is being posted into the payroll expense BARS code.
What we held out of the employee's paycheck, the $1000 will be posted into the payroll clearing or payroll liabilities account.
The entry would show $4000 coming out of the bank account.
$5000 expensed to the payroll expense BARS codes and then $1000 as a negative amount into the payroll clearing account.
In the image below, the total of the employee's portion of SS, Med, Fed Withholding, Benefits and Deductions is $1000.
The employee's gross pay is $5000.
The picture after that shows how the amounts are recorded into the General Ledger.
Now, let’s cut the benefit checks. SBX will generate the benefit AP’s for each vendor. The costs of each benefit will be coded to the Benefit BARS in proportion to how the salary was distributed to the various Salary BARS. Yes, you can have many different codes for salary, going to different departments, different funds, and different kinds of wages that you budget for, such as overtime. For our purposes there’s one benefit line related to our wage line, and all employer payroll costs go there.
When the benefits are posted to the GL to be paid, the entry will be ... what was taken out of the employee's paycheck will be a positive number to the payroll clearing account and the EMPLOYERs portion will be a positive expense.
In the example below, on the 7/01 paycheck, the employee had SS, Med and Fed Income taxes that the employee paid. The employer had their share. The amount the employee paid will be a positive number to the 589.99.00.0000 BARS code and the employers share is coded to a benefits BARS code.
After all the benefits and taxes that came out of the employee's pay are posted to the GL, the payroll clearing account balance should be 0.
The above example would happen if both the payroll and the payroll benefits were paid in the same accounting period. This does not always happen.
Accounting period effects on the Payroll Liabilities Account
Two things will typically happen which will interfere with the zeroing out of your Payroll Liability Account each month or at the end of the year. First, you may have a payroll benefits which are paid quarterly, but employees contribute to it each month. The best example of that is L&I (Worker’s Compensation). The Employee contributes a small amount each pay period, and the total is paid after the end of the quarter, including the Employer’s portion. This means that the Payroll Liability Account will decrease each month. Remember, Employee contributions are NEGATIVE! Only at the end of the quarter will the account return to zero, if you’re following our recommended methods.
The second thing that will interfere with zeroing out the Payroll Liability Account is doing a payroll Draw before the end of the year to be repaid on the first payroll of the following year. The amounts for payroll taxes and FWT (or FIT, if you prefer), will remain in the Liability account due to the Draw. SBX payroll Draws are taxable draws according to IRS rules, which you can search for at www.irs.gov.
Accounting for intra-period effects of the Payroll Liabilities Account
The best ways to zero out your Payroll Liability Account at the end of each quarter and the end of the year is to plan ahead with payroll procedures designed to maximize clean reporting. This means that your benefit payments should be made and written to the GL before the end of each month. All quarterly payments should be written to the G/L as of the last day of that quarter. This will keep the Payroll Liability Account zeroed out at the end of each quarter. Once your last payroll is complete for that quarter, you can run your benefit reporting for your industrial and unemployment insurance, and write them to the G/L.
Troubleshooting The Payroll Liability Account
It is inevitable that errors will creep into your payroll, and it may result in either a positive or negative balance in your Payroll Liability Account. In general, a positive balance in your Liability account indicates that you have either overpaid or pre-paid benefits on behalf of an employee. The amount of the employee’s deduction may be too high, or you might have made manual adjustments to an AP. Conversely, negative balances indicate that you’ve deducted more on the employee’s behalf than you’ve paid out in benefits.
Either one of these situations can throw your reporting out of whack, especially at the end of the year. However, you can diagnose the issues in the Chart of Accounts:
- Find the Payroll Liability Account.
- Double click in the “YTD” cell. This will open the “Detail” window.
- Click the “Liabilities” button.
- A box will pop up asking for a date range input. Input from 1/1/XX to the date you’re current through.
- A report can be generated to printer or PDF that will show the inflow and outflow of deductions and payments for each employee, with a net total for each employee. You can diagnose who may have the issues, and then investigate deductions and benefit payments from there.
You can also output the raw information in the Detail window to excel. You can then create a table that can be sorted for each employee and add a subtotal for their liability.
Tip: It’s a good crosscheck of the Payroll Liability Account to first run your Payroll Cost Report for your Pay Cycle. Look for the total of the “L&I” (or your version of Worker’s Comp) column. If you’ve paid all other benefits but L&I, your Employee’s total deduction for L&I should exactly match the balance in your Payroll Liability Account.
The Payroll Liability Account groups Employee’s together by means of a simple technique. Any payroll item has the following formatting in the “Remark” column in the “Distribution” tab:
LASTNAME, FIRSTNAME MIDDLEINITIAL (benefit description here)
So that’s the Employee’s last name comma space first name space middle initial space dash space. Any line in any transaction that’s coded to your Payroll Liability Account that has that formatting with an employee’s name in the “Remark” section will group itself with that employee’s deductions and payments in the report.
This becomes very important when you make manual changes to an AP. For instance, if the cost of a benefit is higher than what was deducted from an Employee’s check, then you would code the extra amount to be paid from the Payroll Liability Account by editing the benefit AP and ensuring the “Remark” is filled in appropriately for that additional line’s amount. Next pay period you would increase the deduction on the Employee’s paycheck, but again edit the benefit AP to reduce the amount cleared from the Payroll Liability Account.
What happened there? First, you paid additional amounts on the Employee’s behalf. He/She owes the organization. The Payroll Liability Account shows a positive amount in that Employee’s subtotal. You deduct more than normal on the next payroll (ensuring thorough documentation and the Employee knows why: Grievances are bad), such that the normal deduction amount is taken and the additional amount owed is also deducted. When the benefit AP is generated, you reduce the amount paid on behalf of the Employee from the Payroll Liability Account in the AP as well. This will ensure the Payroll Liability Account nets properly to zero and the normal amount of the benefit is paid.
When troubleshooting any other problems with the Payroll Liability Account keep in mind that the goal is to have the account as close to zero as possible. Use the Liabilities Report to look for Employees with unexpected or non-zero balances, and examine your benefit reports. If you do any manual entries or modifications to benefit AP’s those are always the best places to look first.
