Payroll goes Beyond Bookkeeping

Payroll, one of the biggest expenses for restaurants, is an important part of business accounting. The task of recording all the payroll expenses falls under the area of bookkeeping, but the overall payroll process goes far beyond simple bookkeeping.

Adding hours, allocating paid time off, calculating taxes, and applying insurance, garnishment, or other deductions requires management level decisions. Processing payments may require an even higher level authorization.

Once those numbers are calculated, they all need to be recorded in the company books. That is the task of bookkeeping, and can be done at the same level as recording sales and other expenses.

The first issue in recording payroll transactions is that the salary amount is never the same as the payment to the employee, due to the deductions. In a restaurant, there might also be tip amounts that have been received by the company, and added to the employee salary.

To account for $1000 due to an employee, there might be a payment of $825 to the employee, with the remaining $175 split between the accounts used for the deductions. For example, it might break down with tax and insurance deductions as follows:

Salary 1000
Tax Liability account -150
Insurance account -25
Bank Account -825

This would increase your salary expenses by $1000, and decrease your bank account by $825. The difference is recorded in other liability or expense accounts.

The tax liability account normally starts at zero, and goes negative as you accumulate liability. By putting a negative value in that account, it represents what you owe to the tax authorities. You will “fill it back up” to zero by paying the taxes at a later date, when you will subtract more money from your bank account, and add it to the tax liability balance.

The insurance can also go into a liability account, but you could also record it directly into your expense account for employee insurance. For example, depending on the timing of your insurance payments and payroll periods, you may be paying the insurance before some of the deductions are made. Rather than holding the money for later payment, it is actually paying you back for the insurance you already paid.

Recording a negative number directly into an insurance expense account will adjust your total expenses to properly reflect the portion paid by the company. If the company paid the insurance bill and recorded $100 in expense, then records a negative $25 in the same insurance expense account, the company’s net expense is $75.

In fact, if you use an online payroll service to do your tax calculations–and you probably should, since it is the most efficient solution for most small businesses–the payroll service might pull your tax payments and submit them at the very same time that the employee direct deposits go out. In that case, you never actually “hold” that tax money. Rather than recording the negative tax amount into a liability account, you could record it directly into the tax paid expense account. The negative amount would adjust the total expense in the same way as the health insurance example above.

In either case, you would record a single payment from your bank account to the tax authority that would include both employer and employee portions of the tax. In this example, that amount might be $300. Then the negative tax line from the employee paycheck transaction, recorded directly into the expense account, would bring your net tax expense down to $150.

Any other payments made to the employee, such as tips, simply increase the amount to be accounted for with the bank, liability, and expense accounts. It does, however, require that your bookkeeping software allow you to enter multiple lines on both halves of the transaction–multiple items to be paid, and multiple means of payment.

If your employees report their cash tips, the employer is expected to calculate taxes on those tips. While that requires additional steps within the payroll process to add in those amounts, then subtract them back out after tax calculations, those numbers do not necessarily need to be shown in the books. The taxes will be need to be recorded correctly, but if the cash tip amounts used for calculating are saved within the payroll process, they can be stripped from both sides of the equation before entering in to the books.