Entering Payroll Expenses: Problems and Solutions
We often see problems in the way payroll expenses are entered into the books of nonprofit organizations. Here are a few common mistakes:
- Gross wages, payroll taxes and payroll service fees are mixed up in the same account.
- Payroll tax expense is coded to a liability account instead of an expense account, making both the balance sheet and profit and loss report incorrect.
- Payroll is not broken out properly to functional areas (program, management & general and fundraising) using classes.
- Payroll is not properly assigned to grants.
In addition to the above problems, we also see inefficiencies in entering payroll expenses.
Payroll Basic Parts
Payroll expense is comprised of several parts:
- Gross wages
- Employer payroll taxes
- Payroll service fees
Gross wages includes the Medicare, Social Security and income taxes withheld from each employee’s paycheck.
Employer payroll taxes include matching Medicare and Social Security tax (up to the Social Security wage base), as well as other possible taxes such as state unemployment. See our article 10 Steps on Hiring Your Nonprofit Organization’s First Employee for more information on payroll taxes.
Benefits include the employer paid portion of health insurance, contributions to retirement plans, and other benefits.
Payroll service fees are the fees charged by a payroll service provider for the software that allows you to run payroll and file payroll tax returns, or for the service to file returns on your behalf.
When we refer to payroll expenses, we are talking about all of these expenses.
Payroll Expense by Account and Class
On top of keeping track of all the above payroll expense categories, expenses are required for Form 990 and audit purposes to be presented by both natural and functional areas. These two areas correspond to accounts and classes in QuickBooks. Classes are like departments. As an example, gross wages for a program director and the fund development director could be coded as follows:
“Gross Wages” would be an account in the chart of accounts. “Program” and “Fundraising” would be set up as classes. The Profit and Loss by Class report shows how each account line item is split out to the various classes.
Payroll for staff who work in multiple departments could be coded initially to a “Common Costs” class. Later those expenses could be allocated to the actual classes by journal entry. For more information on allocating staff time to functional areas, see our series on nonprofit overhead.
Payroll by Grant
In addition to tracking payroll by expense account and by functional area (class), some organizations must also track payroll by the grants that fund certain staff positions.
Automating Payroll Entry
While payroll can be complicated, fortunately it’s also repetitive which means entering payroll expenses lends itself well to automation. With a little planning you may be able to partially or even completely automate payroll entry. Benefits of automating payroll entry include:
- Less time spent manually entering payroll transactions
- Greater accuracy in payroll entry
- More timely entry of payroll expenses
Payroll Entry Automation in QuickBooks
Some payroll services can automate entry of payroll by account and by class, while other payroll services only automate entry of payroll by account. If the class is not specified, payroll will appear in the NOT SPECIFIED column in the Profit and Loss by Class report. This may or may not be a problem depending on how you use classes within QuickBooks.
For example, Gusto, a full service payroll provider, can import a journal entry for each payroll that codes payroll expense by account and class. (Disclosure: We have not used Gusto in this capacity, but the instructions at their website appear to be clear in this regard.) Patriot Software, a less expensive full service option if you have a simple payroll, can import payroll to accounts, but (at this time) not to classes.
QuickBooks Online Self Service payroll will also integrate employee paychecks into the books by account and class. With the Self Service payroll option, you are responsible for filing payroll tax returns. If you have someone, such as a CPA, who can file returns for you, QuickBooks Online Self Service payroll may be a good option. Intuit is working on bringing the ability to code classes to QuickBooks Online Full Service payroll.
QuickBooks Desktop software, unlike QuickBooks Online, has the ability to do job costing with payroll. This feature is handy if you manage a lot of grants that cover payroll and you want to be able to assign payroll to “jobs” representing those grants. QuickBooks Online does not offer job costing, although you can mimic it manually using sub customers.
Depending on your circumstances, there are also options for partially automating entry.
One option would be setting up memorized recurring transactions as either checks by each employee or as a journal entry. You could save the entries with zero for the amounts and have it automatically generate each pay period. Then all you need to do is fill in the dollar amounts based on the pay stubs or payroll journal.
You could also go with a payroll integration that is partial, as in the case of a payroll service that only imports to accounts. The manual work would be assigning payroll to classes each time.
Another option if you can’t import by class is to run payroll for different classes on different days. This lets you isolate the expense by class based on the date of the payroll. You will still need to assign payroll expense to classes using a journal entry.
Change Payroll System at Start of New Year
The best time to change to a new payroll system is the start of a new year. If you switch midyear, you must bring over historical payroll from January 1. There’s enough time left in 2018 to consider your payroll needs and get set up with a payroll service provider that can work harder for you!