11. Setting Up Payroll

Getting Started

When your business hires employees, one of the more important tasks you will have is making sure your QuickBooks data is set up correctly to handle this responsibility. This chapter details for you the proper setup of your payroll. In Chapter 12, “Managing Payroll,” you will learn how to efficiently review your payroll data, and handle some of those unique payroll transactions.

A common definition of an employee is “a person in the service of another under any contract of hire, express or implied, oral or written. The employer also has the power or right to control and direct the employee in the material details of how the work is to be performed.” If your company hires individuals who meet this criteria, your company is responsible for paying wages, collecting and paying certain federal and state payroll taxes, and filing quarterly and annual forms.

Your company becomes an agent of the federal and state governments because the company must collect certain payroll-related taxes and pay these on predetermined payment schedules.

Payroll Process Overview

QuickBooks is designed to help you set up and manage your company’s payroll. Payroll tasks are easily completed using the Employee Center and Payroll Center. Scheduling your payroll and related liability payments practically eliminates the chance of making errors.

The recommended payroll workflow detailed here, when combined with the frequent review of reports, can help you manage your company’s payroll efficiently and accurately:

1. Sign up for an Intuit QuickBooks payroll subscription.

2. Set Payroll and Employee preferences for your company.

3. Complete (if your data is new) the Payroll Setup process or use the Run Payroll Checkup diagnostic tool included with your QuickBooks software.

4. Set up scheduled payrolls to pay your employees.

5. Pay your scheduled payroll liabilities.

6. Reconcile your bank account each month verifying that the paychecks distributed were cleared for the proper amounts.

7. Review and compare your business financials and payroll reports.

8. Prepare your quarterly and annual state and federal payroll forms directly in QuickBooks (depending on which payroll subscription you have purchased).

When managing payroll in QuickBooks, you will use these transactions:

• Paycheck—Record payment to an employee and automatically calculate all additions and deductions. You can identify these in your bank register as the transactions with a PAY CHK transaction type, as shown in Figure 11.1.

Figure 11.1. Properly created employee paychecks have PAY CHK as the transaction type.

• Liability Adjustment—Modify the payroll liability amounts computed from actual paychecks. You can identify these transactions in your bank register as transactions with a LIAB CHK transaction type.

• Refund Deposit for Taxes and Liabilities—Record any refund received from overpaying your payroll liabilities. You will learn more about this transaction type in Chapter 12, “Managing Payroll.”

Each of these transactions are accessible from the Payroll Center or by selecting Employees, Payroll Center from the menu bar.

When you use the proper payroll transactions, QuickBooks will include the amounts in preparing payments of payroll liabilities due or when preparing state and federal payroll reports in QuickBooks.

Selecting and Activating a Payroll Service Subscription

For QuickBooks to automatically calculate your payroll, you need to purchase a payroll service subscription from Intuit in addition to the purchase of your QuickBooks financial software.

QuickBooks financial software partnered with an Intuit-provided payroll service makes setting up payroll, collecting taxes, remitting timely payments of the collected taxes, and filing the required payroll reports trouble free.

Purchase your payroll service subscription at www.payroll.com, or click the Learn About Payroll Options on the Home page and select a plan that works for your company.

As of the writing of this book, Intuit offers four payroll service options, one of which is sure to meet the needs of your company.

Preparing and Printing Paychecks Only

On the Home page, select Learn About Payroll Options. Choose the “I Want My Accountant...” option. This option is the Intuit Payroll Basic subscription and includes:

• The capability to enter employee hours and let QuickBooks automatically calculate payroll taxes, additions, and other deductions.

• The option to print checks; or, for a small per check fee, you can direct deposit the earnings into your employees’ bank accounts.

• A variety of reports your accountant can use to complete payroll tax forms.

Preparing and Printing Paychecks and File Tax Forms

On the Home page, select Learn About Payroll Options. Choose the “I Want To Pay & File...” option. This option is the Intuit QuickBooks Payroll Enhanced subscription and includes:

• Ability to enter employee hours and let QuickBooks automatically calculate payroll taxes, additions, and other deductions.

• Option to print checks, or for a small per check fee, direct deposit the earnings into your employee’s bank accounts.

• Automatic preparation of federal and most state tax forms for you to print or E-File.

If you are an accounting professional, you can select the Intuit QuickBooks Payroll Enhanced for Accountant’s subscription. With this subscription you can do all of the tasks named previousy plus:

• Create after-the-fact payroll

• Calculate net-to-gross paychecks

• Support up to 50 FEINs with your paid payroll subscription

• Prepare Client Ready Payroll Reports (using Excel)

More details can be found by visiting the www.proadvisor.intuit.com website.

Allowing Intuit Payroll Experts Prepare Your Payroll

On the Home page, select Learn About Payroll Options. Choose the “I Want Intuit Payroll Experts...” option. You can choose from two subscriptions, both detailed here:

• Assisted Payroll Subscription

• Work with a payroll specialist to set up your first payroll.

• Enter hours into QuickBooks to create paychecks. All of your taxes, additions, and deductions are calculated automatically.

• Print checks or offer direct deposit into your employees’ bank accounts.

• Allow Intuit to process tax payments and forms for you, guaranteed accurate and on time.

• Intuit Full-Service Payroll Subscription

• Work with Intuit payroll experts to set up or transfer all your employee data.

• Enter hours into QuickBooks to create paychecks. All of your taxes, additions, and deductions are calculated automatically.

• Print checks or offer direct deposit into your employees’ bank accounts.

• Allow Intuit to process tax payments and forms for you, guaranteed accurate and on time.

Using Intuit Online Payroll

With an Intuit Online Payroll subscription you can prepare payroll anytime, anywhere with an Internet connection. With Intuit Online Payroll you can:

• Enter employee hours online and paycheck additions, and deductions automatically calculate.

• Receive email reminders when it’s payday or tax filing deadlines.

• Print paychecks or direct deposit employees’ paychecks into their bank accounts.

• Process electronic payments and tax filings.

• Allow employees to view their pay stub information online.

• Process payroll using your mobile device.

• Prepare many detailed payroll reports.

• Process an unlimited number of payrolls each month.

• Import the transactions into QuickBooks (as a Write Checks transaction).

Updating Payroll Tax Tables

Your purchase of an Intuit payroll subscription includes periodic tax table updates. When the federal or state government makes changes to payroll taxes or forms, you will be notified that a new tax table is available.

To update your tax tables make sure you are connected to the Internet and you have a current payroll subscription.

To update payroll tax tables, follow these steps:

1. From the menu bar, select Employees, Payroll Center. Your payroll subscription status is detailed to the left. See Figure 11.2.

Figure 11.2. Check the status and manage your payroll subscription from the Payroll Center.

2. From the menu bar, select Employees, Get Payroll Updates.

3. Click the Payroll Update Info button for details about the currently installed tax table version.

4. Select the option to download only changes and additions to the installed payroll files or download the entire payroll update. Click the Update button.

5. Click OK to close the Payroll Update message that tells you a new tax table or updates were installed. Click Troubleshooting Payroll Updates if the update does not install successfully.

6. QuickBooks opens the Payroll Update News dialog box. Click through the tabs of information to learn more about changes made with the installed update. Press the Escape key on your keyboard to close.

7. From the menu bar, select Employees, Payroll Center.

8. On the left side of the Payroll Center, view information about your payroll subscription statuses.

Employer Resources

Getting started with payroll can seem like a daunting task. In this section I share many resources that will help you successfully get started with payroll.

Classifying Workers as Employees

Your business might hire employees and independent contractors (discussed in Chapter 7, “Setting Up Vendors”). Use these IRS guidelines when classifying a worker as an employee:

• Behavioral—Does the company control or have the right to control what the worker does and how the worker does his or her job?

• Financial—Are the business aspects of the worker’s job controlled by the payer? (These include things like how the worker is paid, whether expenses are reimbursed, if the business owner provides tools and supplies.)

• Type of Relationship—Are there written contracts or employee type benefits (that is, pension plan, insurance, vacation pay, and so on)? Will the relationship continue and is the work performed a key aspect of the business?

The IRS provides additional comments on this topic on its website, www.irs.gov. Type “contractor or employee” in the help search box and click the links provided for more details.

Federal and State Required Identification

Your business will likely have identification numbers assigned by federal, state, and local governments. The identification numbers detailed here represent the basic identification numbers you will need to properly report and pay payroll liabilities.

As mentioned earlier, your company becomes an agent of the state and federal government when it collects from employees certain taxes that are required to be reported and paid to the respective legal entity. Your company will need the following identification numbers for properly reporting and remitting your payroll taxes:

• Federal Employer Identification Number—Commonly referred to as FEIN. This number is obtained from the Internal Revenue Service. Visit www.irs.gov for instructions.

• State Withholding Tax ID—Issued by the states you do business in and used to file and pay state income tax withheld from your employees’ paychecks. Some states might also require IDs by city, county, or both. Call your state tax department or search your state’s website for more details.

• State Unemployment ID—Issued by the states you do business in and used to pay and file state unemployment reports. Call your state tax department or search your state’s website for more details.

• Other identification numbers as required by the state, county, or city jurisdictions you do business in.

You might be processing payroll before you have your assigned identification numbers. Check with your state taxing authority for instructions on paying these liabilities while you wait for your proper identification number to be assigned.

IRS and Other Forms

Your business is required to have on file for each employee a Form W-4: Employee’s Withholding Allowance Certificate. You can access this form and other useful forms for your business in the Your Taxes section of the following website: http://payroll.intuit.com/support/forms/index.jsp. If the forms provided at this site are not the most current, you can also go to www.irs.gov.

State Reporting

Each state that you have employees working in will have specific filing requirements. You are even required to report new hires and in some states report independent contractors. Your state might also require city and county reporting. You can access information from each state’s website, or Intuit provides useful information on the following websites:

• http://payroll.intuit.com/support/PTS/

• http://payroll.intuit.com/support/PTS/statelocaltax.jsp

Properly tracking and reporting to the state your payroll activity will help you avoid costly penalties for not filing timely.

Other General Requirements

There are many other requirements of the business owner when paying employees, including displaying the most current federal and state labor law posters at your place of business. More information can be found at www.freeposteraudit.com.

Because payroll requirements are changing all the time, make sure you have an accounting professional who can review your payroll setup or who can file the returns for you.

Creating Payroll Accounts in the Chart of Accounts

Proper payroll tracking includes having the necessary payroll liability and expense accounts in the chart of accounts.

Review your data to make sure you have these accounts or create them as needed. Adding subaccounts (see Figure 11.3) to the default accounts created by QuickBooks can help you track the financial details of payroll more efficiently.

Figure 11.3. Create subaccounts for payroll liability and expenses for more detailed reporting.

See “Chart of Accounts,” p. 77 for more information on creating these subaccounts.

Typical accounts to create for working recording payroll transactions include:

• Bank Account—QuickBooks does not require that you have a separate bank account for payroll transactions. Companies with large amounts of funds from operations might choose to have another bank account for payroll transactions. Having a separate bank account for payroll can limit the business’ financial exposure from fraud.

• Payroll Liabilities—Other Current Liability—QuickBooks uses this account type to track the amount owed to federal or state governments, health insurance providers, and so on. QuickBooks creates this account for you automatically. Include the following as subaccounts to this account and add additional subaccounts as needed:

• FICA/Medicare Payable (also referred to a 941 taxes). For simplicity, I recommend a single account combining the employee deductions and employer contributions.

• State Unemployment Payable (also referred to as SUTA).

• Federal Unemployment Payable (also referred to as FUTA).

• Health Insurance Payable.

• Wage Garnishments.

• Job Costs—Cost of Goods Sold. Many industries track the costs associated with providing a service or product to their customers or jobs. To track these properly on your Income Statement, use the Cost of Goods Sold account category. Do not overuse this category by adding too many to the chart of accounts; instead use QuickBooks items for greater detail.

• Overhead Costs—Expense—When you create a company-paid payroll item you will assign an account for the expense. Payroll items are used on paycheck transactions and have account(s) assigned to them. QuickBooks automatically creates a Payroll Expenses account. Typically, you would add the following as subaccounts:

• Salaries & Wages—Assign to payroll compensation items.

• Payroll Taxes—Assign to the employer Social Security and Medicare payroll items.

• State Unemployment—Assign to your state(s) unemployment payroll item.

• Federal Unemployment—Assign to the Federal Unemployment payroll item.

• Employee Benefits—Assign to company-paid benefits including health, dental, life insurance, and other types of benefits.

A comprehensive chart of accounts that includes subaccounts for liabilities and expenses will make it easy for you to review your payroll and fix any errors.

Setting Up Payroll Tax Vendors

Tracking, paying, and reporting payroll liabilities balances can be improved if you identify the vendors by the tax or benefit being paid. This is important for states or other agencies that have the same payee name for multiple payroll liabilities.

Creating separate vendor records is recommended, but not required. When processing the payroll liability payments from the Payroll Center, QuickBooks will prepare a separate liability check for each:

• Unique liability payroll item assigned to a specific payee.

• Liability payment with a different due date.

When preparing the Federal 941/944 and Federal 940 payments, QuickBooks will create a separate check for each type of liability or for same payroll item types but with different due dates. See the Pay Scheduled Liabilities section in Figure 11.4. This is necessary so that the reporting and payment for these liabilities follow strict due date guidelines dictated by the state, federal government, or other entity being paid.

Figure 11.4. QuickBooks will prepare individual checks for the different payroll items and for the same payroll items but with different due dates.

To learn more about creating your vendor records, see “Adding or Modifying Vendors,” p. 194.

The following is a list of some of the more common payroll vendors you should create when you are managing payroll:

• United States Treasury—941

• United States Treasury—940

• State income tax vendor

• State unemployment tax vendor

• Health insurance vendor

Payroll Preferences

After you sign up for one of the Intuit Payroll Service subscriptions, you need to enable payroll and set some payroll-specific and employee-specific preferences. There are two types of preferences in QuickBooks:

• My Preferences—Settings that are unique to the user logged into the data file and are not shared by other users.

• Company Preferences—Settings that are common for all users. When a preference is modified on the Company Preferences tab, the change affects all users.

For this section, reference is only made to Company Preferences, as there are not any My Preferences that directly affect the payroll process. Log into the file as the Admin or External Accountant user in single-user mode to set the following preferences.

Payroll and Employee Preferences

These specific preferences are set for all users. To set up payroll and employee preferences, follow these steps:

1. From the menu bar, select Edit, Preferences to open the Preferences dialog box. Select the Payroll & Employees—Company Preferences tab as shown in Figure 11.5.

Figure 11.5. Setting defaults improves accuracy and efficiency when working with payroll activities.

2. Select the Full Payroll option button in the QuickBooks Payroll Features box. This button enables the remaining features in the Preferences dialog box.

3. Select the checkbox next to the features that are appropriate to your business:

• Copy Earnings Details from Previous Check—Copies hours, rates, and Customer:Job from prior paycheck.

• Recall Quantity Field on Paychecks—Recalls line 1 of a previous paycheck, payroll item, and rate only; no Customer:Job recalled.

• Recall Hour Field on Paychecks—Recalls total hours only and places total number of hours on a single line even if prior paycheck had several lines.

• Job Costing, Class, and Item Tracking for Paycheck Expenses—Enables QuickBooks to add the cost of company-paid taxes to the burdened costs for time that is assigned to a Customer:Job. QuickBooks also offers the Class Tracking by Paycheck or Earnings Item option if you have the class tracking preference enabled.

4. Choose the default for displaying employee names on reports. Choose to display by First Name or Last Name.

5. Select the Mark New Employees as Sales Reps checkbox if you want new employees automatically added to the sales rep list. An employee who is also a sales rep can be listed on a customer invoice transaction so you can report on sales by rep.

6. Select the Display Employee Social Security Numbers in Headers on Reports checkbox if you want to display this sensitive information on reports.

7. Click the Employee Defaults button to set the following defaults for new employees:

• Earnings items and rate

• Time data to create paychecks

• Additions, deductions, or company contributions payroll items

• Employee coverage by qualified pension plan

• Payroll schedule or pay frequency

• Class (if the QuickBooks Class preference is enabled)

• Taxes for federal and state tax settings

• Sick and vacation settings

8. Click OK to close the Employee Defaults dialog box.

9. Click the Set Preferences for Pay Stub and Voucher Printing button to open the Payroll Printing Preferences dialog box shown in Figure 11.6. In this dialog box, you can customize what detail will print on employees’ paycheck stubs.

Figure 11.6. Customize the information that will print on the employee’s paychecks or paystubs.

10. Click the Workers Compensation button to set the preference to track worker’s comp, to be warned when worker’s comp code is not assigned, and to exclude overtime hours from worker’s compensation calculations.

11. Click the Sick and Vacation button to set default accrual period, hours accrued, maximum number of hours, and if the hours should be reset each new year.

Checking

These specific preferences are set for all users. From the menu bar, select Edit, Preferences to open the Preferences dialog box. Select the Checking preference from the left side and click the Company Preferences tab.

In the Select Default Accounts to Use box, select the Open the Create Paychecks checkbox or the Open Pay Payroll Liabilities checkbox and specify a bank account from the drop-down list.

Time and Expense

These specific preferences are set for all users. To set up time and expense preferences, follow these steps:

1. From the menu bar, select Edit, Preferences to open the Preferences dialog box and select the Time & Expenses—Company Preferences tab.

2. Select Yes in the Time Tracking box if you plan to use timesheets to record employee work hours.

3. If necessary, change the First Day of Work Week from the drop-down list.

Using the Payroll Setup Interview

The Payroll Setup Interview is helpful for new and existing QuickBooks payroll users. New users will appreciate how it walks you through setting up your first payroll.

For existing QuickBooks Payroll users, the Payroll Setup will help you by identifying missing information necessary for properly preparing, reporting, and paying payroll. If you do not have all of the information needed at the time of setup, select Finish Later to exit the Payroll Setup. You can return later to update the information.

Information Needed to Set Up Payroll

The following information should be collected, where possible, before beginning to set up your payroll:

• Compensation types—Compile a list of the types of pay you offer, such as hourly, salary, overtime, vacation, and so on. You will be establishing a QuickBooks payroll item for each of these.

• Other additions or deductions to payroll—Some examples: dental insurance, uniforms, and union dues to name just a few.

• Employee names, addresses, and Social Security numbers—Form W-4: Employees Withholding Allowance Certificate.

• Payroll tax payment schedules and rates—That is, what frequency your business is required to pay payroll taxes, including the rate you pay for your state unemployment tax and other taxes.

• A year-to-date payroll register from your previous payroll system—If you’re transferring your payroll process to QuickBooks at any other time than the first of a calendar year, request a year-to-date payroll register from your previous payroll system.

For more information, see “Mid-Year Payroll Setup,” p. 394.

• Any year-to-date payroll tax and other liability payments made prior to using QuickBooks—These will help you to prepare your startup payroll records in QuickBooks.

With this information collected, you are ready to begin using the Payroll Setup Interview. This handy tool uses a question-and-answer format to walk you through customizing your payroll settings. When completed, you can begin preparing payroll checks for your employees.

Introduction

The Payroll Setup Interview will guide you through adding the necessary payroll items needed to begin processing payroll.

After purchasing a payroll service subscription, launch Payroll Setup (see Figure 11.7) by selecting Employees, Payroll Setup from the menu bar. Optionally, click the link Payroll Item Checklist (not shown in Figure 11.7). Click Continue.

Figure 11.7. Selecting the right option for setting up payroll will affect the menus provided in the QuickBooks Payroll Setup dialog box.

Choose one of the following that best describes your business payroll setup needs:

• The Company Has Never Issued Paychecks—Manually through an accountant or using another payroll service.

• The Company Is Changing to QuickBooks Payroll—Paychecks have been issued in the same year you are starting to use QuickBooks payroll.

The instructions that follow assume no prior paychecks have been issued. Your menu options will differ if you selected the Company Is Changing to QuickBooks Payroll.

Company Setup

The Company Setup introduction provides two methods for creating pay types and benefits:

• Typical New Employer Setup—QuickBooks automatically creates common payroll items.

• Custom Setup—Select this option if you need to set up sick time, vacation time, or insurance benefits.

To learn more about adding custom payroll items, see “Adding or Editing Payroll Items,” p. 406.

The instructions that follow will assume you selected Typical New Employer Setup. Click Continue to begin setting up your employees (see Figure 11.8).

Figure 11.8. Be sure to have your employees’ information ready when you run the Payroll Setup Interview so you can complete each of the required fields.

Employee Setup

You can work most efficiently with entering your employees if you have all of the required information listed here. Complete the following information:

• Legal Name.

• Contact Information.

• Employee type and other hiring information.

• Payroll schedule, pay type, and rate (see Figure 11.9).

Figure 11.9. Assign the pay frequency and rate to improve the accuracy of the prepared paycheck.

• Additions or deductions to employee’s payroll.

• Determine what method of payment will be made for the payroll—check, direct deposit to an Intuit Pay Card, bank account, or splitting the amount into multiple direct deposit bank accounts.

• The state worked in and state subject to withholding taxes.

• Federal tax information from the employee’s Form W-4, and select the proper withholdings and credits. Most employees’ wages are subject to Medicare, Social Security, and Federal Unemployment.

• Whether the employee is subject to any special local taxes.

Information required will differ from state to state.

Click Finish (not shown in Figure 11.9) to complete the setup for this employee. If you have not completed all of the information you might get a Missing Information error message. Read the information and click OK to close the message or Cancel to return to the setup. Choose Add New to continue with the next employee setup or select an employee from the list and click Edit, Delete, or Summary.

First Paychecks

With the few steps you have completed you can immediately create paychecks. If you are in a hurry to prepare paychecks, click the Create Paychecks button. However, I recommend completing the setup by selecting the second option listed:

• Click the Create Paychecks button to be returned to the Payroll Center where you can immediately pay your employees.

• Click the Continue button to Complete the Tax Setup, providing agency information (recommended).

Tax Setup

Continuing with the payroll setup, review the tax items created automatically for you and enter the rates your business pays for federal and state taxes:

• 941/944 Form—Identify which tax form you file.

• Federal Taxes—Review the federal payroll tax items created for you (you will add to or edit them later).

• State Tax—Click Add New to create a specific local/custom tax and define the state you are creating a payroll tax item for. Click Finish. Click Add New, Edit, or Delete. Click Continue when you have finished setting up state tax payroll items.

• Schedule Payments—Assign the tax item deposit method of check or E-pay, payee, and payment frequency. If you are uncertain what payment schedule your business should follow, contact your tax accountant or click the link “How Often Should I Pay These Taxes” for additional resources.

When a “Fix This Error Now” icon displays during Payroll Setup, heed the warning. If you don’t, your payroll transactions or reporting might be incorrect. See Figure 11.10.

Figure 11.10. The QuickBooks Payroll Setup detects any setup errors or missing information.

Mid-Year Payroll Setup

In the accounting community, the term “mid-year” refers to setting up payroll at any other time other than at the beginning of the current calendar year.

This method is needed only for companies converting to QuickBooks payroll in a calendar year that had prior payroll produced using software or through a payroll service provider.

When you make the decision to begin using QuickBooks payroll in a year that you have already had payroll transactions, you can:

• Manually re-create in detail all your previous payroll transactions, you will not need to follow the steps in this section.

• Record year-to-date totals for previously issued payroll checks and liability payments, following the steps given in this section.

Before beginning this process, make sure you have accurate records of the prior period payrolls, preferably subtotaled by calendar quarter. To set up mid-year payroll totals using the Payroll Setup, follow these steps:

1. On step 1 of the Payroll Setup (select Employees, Payroll Setup from the menu bar), select The Company Is Changing to QuickBooks Payroll. QuickBooks will add additional menus to the Payroll Setup necessary for completing YTD entries.

2. Complete steps 2–4 entering the required information for Company, Employee, and Taxes setup as detailed previously.

3. On step 5 (Year-to-Date Payrolls), select Determine If Needed.

4. Click Yes to Has Your Company Issued Paychecks This Year?

5. Click Continue. QuickBooks opens the Enter Paychecks by Employee dialog box as shown in Figure 11.11. This dialog box, with functionality similar to Microsoft Excel’s, streamlines the task of entering year-to-date payroll totals for your employees.

Figure 11.11. Use this worksheet in QuickBooks Payroll Setup to record prior year paychecks.

6. Click the Show Steps button to have QuickBooks provide a pop-up dialog box of the steps for entering the information to be typed in each cell.

7. Click the Customize Columns button to arrange the columns of data to match the reports from your prior software or payroll provider, which simplifies the data entry process.

8. To begin entering data for your employees, click the drop-down list for You’re Entering Paychecks For and select the employee name.

9. Right-click to conveniently copy, paste, delete, or insert rows. This functionality is especially useful when entering repeating information such as for salaried employees.

10. Conveniently check your monthly and annual totals as you type directly from the Enter Paychecks by Employee dialog box to make sure your data entered agrees with your prior payroll records.

11. Click View Reports, and QuickBooks includes two reports to help report on the accuracy of the setup details. Once the reports are displayed you can print the report, export the report to Excel, or compress the report to fit on the printed page. See Figure 11.12.

Figure 11.12. The Historical Paycheck—Basic report is useful to review and compare to the payroll records you have before using QuickBooks.

• Historical Paycheck Report—Basic—The report details the gross pay and any deductions or company expenses. This report should be reviewed carefully to make sure the totals match your prior payroll records.

• Historical Paycheck Report—Advanced—Click the Switch to Advanced Report. The Advanced report compares the combination of historical paycheck detail with any employee or company payroll liability adjustments. If your historical payroll and adjustments (if needed) were correctly entered, the QuickBooks-Calculated amount column should equal your totals for those payroll tax items as reported to your federal and state governments.

12. Click the X in the top-right corner to return to the Enter Paychecks by Employee dialog box.

13. Click the Done Entering Paychecks button to return to the QuickBooks Payroll Setup dialog box. As each paycheck, tax payment, and non-tax payment are entered, the boxes will be shaded green progressively until each task is complete, making it easy to return where you left off.

Congratulations, you have completed the tasks necessary to set up your year-to-date payroll and you can now process new payroll transactions. Now would be a good time to complete the Run Payroll Checkup diagnostics discussed in the next section.

Using the Run Payroll Checkup Diagnostic Tool

After you complete the payroll setup and you have created payroll checks or year-to-date entries in QuickBooks, you are ready to review your data using the Run Payroll Checkup diagnostic tool.

This feature is similar to the previously listed Payroll Setup feature. In fact, when you open the Run Payroll Checkup diagnostic tool, it also opens the Payroll Setup feature, but some of the menu choices are different.

What makes the Run Payroll Checkup tool different from the Payroll Setup tool? After you have set up your payroll, you will most likely use the Run Payroll Checkup tool to diagnose errors with setup and transactions.

The QuickBooks Run Payroll Checkup enables you to “Finish Later” and return where you left off. Before you begin the Run Payroll Checkup dialog box, make sure you have the following information available in case any of it is missing or incorrect:

• Employees’ names, addresses, and Social Security number.

• Compensation, benefits, other additions, or deductions your company offers.

• Missing or incomplete information when you originally set up the employees; an example was shown previously in Figure 11.10.

• Compensation items, other additions, and deductions for missing or incomplete information.

• For existing data, review of actual wage and tax amounts provides an alert if any discrepancy is found, as shown in Figure 11.13.

Figure 11.13. QuickBooks Payroll Setup detects certain payroll tax computation errors.

To have the payroll diagnostic tool within QuickBooks review your payroll setup for missing information and paycheck data for discrepancies, do the following:

1. From the menu bar, select Employees, My Payroll Service, Run Payroll Checkup. Follow each of the dialog boxes, clicking Continue through each step.

2. In the Data Review dialog box, click Yes. QuickBooks will review the wages and taxes in the payroll records.

3. If errors are detected, click the View Errors button. QuickBooks opens the error detail, as shown in Figure 11.13.

4. Click the Print button in the Payroll Item Discrepancies dialog box.

5. If you click the Continue button, some errors will require you to fix them before proceeding.

6. Click the Finish Later button to close the Run Payroll Checkup diagnostic tool so you can create correcting entries.

Using the errors displayed earlier in Figure 11.13 as an example, the following are the typical steps for correcting them. (Your errors will be different and might require adjustments to other types of payroll items than are detailed here.)

1. From the menu bar, select Reports, Employees & Payroll, Payroll Summary. Review this report for either prior or current payroll quarters (depending on where the error was detected). In Figure 11.14, compare the Payroll Summary report to the Payroll Item Discrepancies report in shown earlier in Figure 11.13. The Should Be amount should equal what your Payroll Summary report shows when prepared today.

Figure 11.14. The amounts included in the Payroll Summary report should match the Should Be amounts in the Payroll Item Discrepancies report.

2. From the menu bar, select Employees, Payroll Taxes and Liabilities, Adjust Payroll Liabilities; see Figure 11.15.

Figure 11.15. Create a liability adjustment to correct any errors found in the Payroll Item Discrepancies report.

3. Enter the Date and Effective Date. Both should be dated in the quarter you want to effect the change.

4. Select either Company or Employee for the adjustment. Company indicates it is a company-paid adjustment. Employee indicates an employee-paid adjustment and will affect W-2 reported amounts.

5. Optionally, assign a class if your business tracks different profit centers.

6. Click Accounts Affected only if you do not want to affect liability and expense account balances. This would be necessary if your Balance Sheet is correct, but the Pay Scheduled Liabilities balances in the Payroll Center are incorrect.

7. If opened, click OK to close the Accounts Affected dialog box. Click OK to save the transaction.

8. Return to the Run Payroll Checkup menu to review your payroll data again after the correction. If your adjustments were successful, QuickBooks displays a Congratulations message showing all adjustments have corrected the discrepancies.

Managing Employees

If you are a new QuickBooks payroll user, I recommended using the Payroll Setup for adding payroll items and employees. You can return to the Payroll Setup to add additional employees or use the following instructions to add or edit employee information. Refer to the instructions in the “Employee Setup” section of “Using the Payroll Setup Interview” in this chapter.

Using the Employee Center

QuickBooks makes adding, modifying, and researching employee activity easy from the Employee Center as displayed in Figure 11.16.

Figure 11.16. The Employee Center provides one place to access common employee tasks and reports.

On the Home page, click the Employees button to open the Employee Center. Alternatively, you can also click the Employees icon on the icon bar.

From the Employee Center, you can view contact details for your employees and access many payroll-related tasks to

• Add a new employee or edit an existing employee’s information.

• Manage employee sales rep information and new employee defaults.

• Print paychecks, paystubs, and other useful list information.

• Enter time for employees.

• Export to Excel employee lists and transactions.

• Export to Excel Client Payroll Reports (requires a payroll service subscription for accounting professionals).

• Prepare employee letters and customize vendor letter templates using Word.

• Filter the list of employees to include All Employees, Active Vendors, or Released Employees.

• Attach documents to the employee record.

• Access a map and driving directions to the employee’s address.

• Add and edit employee notes and to do reminders.

• View and filter the list of transactions by employee or by transaction type.

• Prepare a QuickReport, Payroll Summary, Paid Time Off Report, or Payroll Transaction Detail report for the selected employee.

Use the Employee Center to access many of the common employee transactions and reports you will learn about in this chapter.

Adding or Editing Employee Information

Have you completed the steps outlined in the Payroll Setup? You can now easily add a new employee or modify the information for an existing employee in the Employee Center.

Managing your employees’ information from the Employee Center is easy. To edit an employee’s information, select an employee on the left side of the dialog box and click the Edit Employee button (top right).

Finding Payroll Transactions

The Employee Center provides a single location for maintaining employee records and reviewing payroll transactions in QuickBooks.

On the Home page, click the Employees button to open the Employee Center. Select an employee on the left side of the dialog box to display individual transactions assigned to that employee on the right. With the employee Dan T. Miller selected in the Employee Center, QuickBooks displays individual transactions for that employee. See Figure 11.19.

Figure 11.19. Filter for specific transactions types and dates for the selected employee.

Another useful feature of working with the Payroll Center is found on the Transactions tab. From the Transactions tab in the Employee Center, you can easily locate payroll and non-payroll transactions for all employees.

In the next section you will learn about managing your payroll items.

Managing Payroll Items

QuickBooks uses payroll items to calculate and track compensation, additions, deductions, and company expenses that result from paying employees. You need to set up your payroll items only once, which in turn makes processing payroll as easy as reporting the time an employee works.

Adding or Editing Payroll Items

If you are new to QuickBooks payroll, I recommend that you begin by using the Payroll Setup. During the Payroll Setup you were provided with two options for creating your list of payroll items:

• Typical New Employer Setup—QuickBooks adds the most common payroll items for you.

• Custom Setup—Select this option if you need to set up sick time, vacation time, or insurance benefits.

If you have been using QuickBooks for payroll you will no longer see these two options. The fields required to be completed will differ depending on the type of payroll item.

To add a deduction payroll item, follow these steps:

1. From the menu bar, select Lists, Payroll Item List.

2. Select New from the Payroll Item drop-down list (or use the Ctrl+N keyboard shortcut).

3. Select one of the following methods:

• EZ Setup—Opens the Payroll Setup using standard settings, recommended for most users. To learn more about using this option, see “Using the Payroll Setup Interview,” p. 390.

• Custom Setup—Offers a more traditional approach to setting up payroll items, recommended for expert users.

4. If you selected Custom Setup in step 3, the Add New Payroll Item dialog box displays.

5. Select a payroll item type, such as Deduction (shown in Figure 11.21), and then click Next.

Figure 11.21. Select the appropriate payroll item type to be created.

6. Type a name for the payroll item. This name will display on paychecks and in reports. Selecting the Track Expenses by Job might be suitable for most company contribution and addition items and would include this payroll item in Job Profitability reports. Click Next.

7. On the Agency for Employee-Paid Liability screen, enter the following:

• From your vendor list, select the agency to which you pay the liability. If necessary, click Add New to create a new vendor record. Skip this field if the deduction is not being paid to anyone as Figure 11.22 shows creating a cell phone deduction to employees checks.

Figure 11.22. Payroll deductions can recover from the employee a portion of a business paid expense.

• Optionally, enter the account number that identifies you to the agency you pay the liability to.

• Make a selection from your chart of accounts. In this example, Payroll Liabilities is selected. If you followed the previously recommended process for creating detailed payroll accounts on your chart of accounts, select the appropriate subaccount. If the deduction payroll item is used to recover a business-paid expense from employees, select the corresponding expense account. Click Next.

8. Select the appropriate Tax Tracking Type or None if none of the types apply, as shown in Figure 11.23. This choice is very important to proper set up your payroll items. If you are unsure, ask your accountant for advice. Click Next.

Figure 11.23. Carefully reviewing the Tax Tracking Types can help with accurately setting up payroll.

9. The Taxes screen displays. In most cases, you will not need to modify the settings in this screen. Click Default to return to the original settings. Click Next.

10. The Calculate Based on Quantity screen offers the following choices:

• Calculate This Item Based on Quantity

• Calculate This Item Based on Hours

• Neither

11. After making a selection, click Next.

12. Select to calculate the deduction from Gross Pay or Net Pay. If you are unsure, ask your accountant as the correct selection will depend on the item being set up. Click Next.

13. Enter a Default Rate, optional Default Upper Limit, and specify if the limit is annually reset. If the rate or upper limit differs for each employee, do not enter amounts here. The rate and limit can be added individually to each employee’s record. Click Finish.

14. Click OK after reading the Schedule Payments message. For more information, see “Creating or Editing a Payroll Schedule,” p. 413.

Reporting About Payroll Items

Review your payroll items list after adding to or modifying it. From the menu bar, choose Lists, Payroll Item List. QuickBooks displays the Payroll Item List dialog box (see Figure 11.24). To expand the report for better viewing, double-click the words “Payroll Item List” at the top of the dialog box. To add or remove columns, right-click and select Customize Columns.

Figure 11.24. View the Payroll Item List for information about the setup and accounts assigned to the payroll items.

The following information is displayed when viewing the Payroll Item List:

• Item Name—Displayed on paychecks and reports.

• Type—This is from a predefined list in QuickBooks. The type determines whether it is added to gross wages or deducted

• Amount—This figure is determined by the QuickBooks-provided payroll tax tables, with the exception of State Unemployment, city, and local taxes, which are user defined.

• Annual Limit—This figure is determined by the QuickBooks-provided tax tables and is not modifiable by the user. Incorrect limits could be due to a payroll tax table that is not current.

• Tax Tracking—When you create a new payroll item and select a payroll item type, QuickBooks provides a predetermined list of tax tracking types associated with that item type. Tax tracking determines how QuickBooks treats the item on the W-2 year-end employee tax form.

• Payable To—Checks are payable to the named entity.

• Account ID—The identification number your tax payment agency has assigned to your company.

• Expense Account—If the payroll item type is considered an expense, users can define the default expense account from the chart of accounts list in the payroll setup. QuickBooks defaults this account to a generic Payroll Expense account, which is created automatically by QuickBooks when payroll is enabled.

• Liability Account—This account is used for payroll items that are accrued with payroll and paid to the state or federal government. QuickBooks defaults these items to a generic liability account created when payroll is enabled. You can define what liability account is assigned. If you are creating a new account, it should be a subaccount of the one QuickBooks provides if you want to see certain warnings that are provided when you try to create a transaction incorrectly.

Additionally, from this screen view of the payroll items list you can access the following:

• Payroll Item—Add, edit, delete, make item inactive, find in transactions, and print list.

• Activities—Access the Payroll Setup and other common payroll item tasks.

• Reports—Access summary or detail reports of payroll item transactions.

Paying Employees

Having completed your Payroll Setup and Run Payroll Checkup, you are ready to begin paying your employees. If you previously paid your employees’ payroll with other software or by a payroll agency, record the year-to-date payroll totals for each employee.

For more information, see “Mid-Year Payroll Setup,” p. 394.

The next sections provide details on preparing payroll for your employees.

Payroll Home Page Workflow

With a paid payroll subscription you might have all or some of the following icons on your Home page providing easy access to the typical payroll workflow. Your icons might differ from those shown in Figure 11.25 depending on the payroll subscription purchased and the preferences you have set in QuickBooks.

Figure 11.25. The Home page provides access to the proper payroll workflow.

Entering Employee Time

QuickBooks includes a weekly or activity timesheet you can use to record employee work time and create paychecks. You can access timesheets by clicking the Enter Time icon on the Home page.

Using timesheets will simplify the process of creating payroll records if you track employees’ time by customers, jobs, or service items. Timesheets are not necessary if your employees are paid a fixed amount (salary) or work the same hours each pay period. Features of using timesheets in QuickBooks include:

• Using a stopwatch to time an activity as it is performed.

• Entering the time manually using a weekly timesheet or individually by the activity as shown in Figures 11.26 and 11.27.

Figure 11.26. Weekly timesheets can be used to create payroll transactions.

Figure 11.27. The Time/Enter Single Activity includes a stopwatch.

• Adding the time to a customer’s invoice. For more information, see “Time and Expense Invoicing,” pg. 303.

To record payroll timesheet activity, follow these steps:

1. On the Home page, click the drop-down list next to the Enter Time icon and select Use Weekly Timesheet or Time/Enter Single Activity. The following instructions presume you selected the Weekly Timesheet.

2. From the Name drop-down list, select the employee whose time you want to enter. If you want to enter multiple names, select Multiple Names (Payroll) from the list. Adding multiple names to a timesheet can be useful if you have crew labor that performs the same service items for the same customers or jobs.

3. Click Copy Last Sheet if you need to repeat the detail from a previously recorded timesheet.

4. Enter data in each of the columns. Your columns might differ depending on your purchased payroll subscription and payroll preferences you enabled.

5. Optionally, click the Print button to print the current timesheet with a signature line. If you want to print a blank timesheet, click the down arrow to the right of the Print button and select Print Blank Timesheet.

6. Click Save & Close when completed with the timesheet entry.

Preparing Employee Paychecks

You are now ready to create paychecks for your employees. Following the instructions provided in this chapter can help to make this process efficient and accurate.

Creating or Editing a Payroll Schedule

A payroll schedule defines the payroll frequency, the pay period end date, and the date that should print on the employee’s paycheck. If you create at least one payroll schedule, the Payroll Center will display the next scheduled payroll. Another use for payroll schedules is to separate your employees into different groups. If your business pays the administrative staff biweekly but your operations employees weekly, you would set up two payroll schedules.

To create or edit a payroll schedule, select Employees, Add or Edit Payroll Schedules from the menu bar. Complete the information required and click OK to save the schedule. Press the Esc key on your keyboard to close the Payroll Schedule List.

Next, assign your employees to the newly created scheduled payroll.

For more information see, “Adding an Employee,” pg. 402.

Paying Employees

To prepare your QuickBooks payroll paychecks, follow these steps:

1. On the Home page, click the Pay Employees icon. The Payroll Center opens (refer to Figure 11.4).

2. Select a Payroll Schedule and click Start Scheduled Payroll.

3. From the Enter Payroll Information dialog box:

• Accept the default Pay Period Ends and Check Date or change as necessary.

• Place a checkmark next to each employee you want to pay. Optionally, click the Check All or Uncheck All button as shown in Figure 11.28.

Figure 11.28. The payroll information defaults from the scheduled payroll setup and employee’s salary or time sheet details.

• Optionally, use the Sort By and Show/Hide Columns to customize how the information is displayed.

• Verify that the affected employee records have the Use Time Data to Create Paychecks option selected (refer to Figure 11.17) if the time did not import. This is valid only if you created timesheets or individual time activities and allowed QuickBooks import the time detail.

• Optionally, enter your employee’s hours in the Enter Payroll Information dialog box.

• Optionally, click the Open Paycheck Detail to review and or edit information not displayed on the Enter Payroll Information dialog box. Click Save & Next or Save & Close to return to the Enter Payroll Information dialog box.

4. Click Continue. The Review and Create Paychecks dialog box displays as shown in Figure 11.29.

Figure 11.29. Select paycheck printing options and review paycheck details.

5. Change the Bank Account if necessary.

6. Choose to Print Paychecks from QuickBooks or Assign Check Numbers to Handwritten Checks.

7. Click Create Paychecks.

The following section details printing of paychecks or paystubs.

Printing Paychecks or Paystubs

The last step in preparing payroll for your employees is printing the checks. There are two options available:

• Print Paychecks—Prints on check stock for employees to deposit or cash.

• Print Paystubs—Creates a non-negotiable document detailing the employee’s earnings. Use this dialog box when an employee is paid by direct deposit.

When you click Create Paychecks, the Confirmation and Next Steps dialog box displays as shown in Figure 11.30.

Figure 11.30. You can print paychecks now, or later by selecting File, Print Forms, Print Paychecks, or Print Paystubs from the menu bar.

After successfully printing your employees’ paychecks, you will want to promptly pay the payroll liabilities to avoid costly penalty and late fees.

To learn more about printer settings in QuickBooks, see “Setting Form Defaults and Making Printer Adjustments,” p. 443.

Preparing Payroll Liability Payments

When your business pays employees, you also become responsible for paying the liabilities associated with the payroll to governmental and other entities.

Paying Scheduled Liabilities

To pay scheduled payroll liabilities, follow these steps:

1. On the Home page, click the Pay Liabilities icon. QuickBooks opens the Payroll Center. The Pay Scheduled Liabilities lists each payroll liability (amount you owe), with the Due Date, Status, Payment Description, Method, Period, and Amount (refer to Figure 11.4).

2. To process a payment, place a checkmark next to the payroll item you want to pay. Optionally, double-click the Amount to view a listing of the transactions that are included in the amount due.

3. Click View/Pay. QuickBooks prepares a Liability Payment for your review, as shown in Figure 11.31.

Figure 11.31. QuickBooks payroll calculates the tax payments automatically.

4. Change the Bank Account if needed. The payroll items and amount included on the liability payment are calculated from payroll transactions. Check E-Payment to process your payment electronically, or for more information click the How Do I E-Pay link.

5. Print the checks from the top-right Print icon, or later by selecting File, Print Forms, Print Checks from the menu bar.

6. Click Save & Close when completed to return to the Payroll Center, Pay Scheduled Liabilities.

Adjusting Payroll Liabilities

QuickBooks automatically calculates payroll liabilities as you process paychecks. If you determine that an amount is not calculating correctly, review the settings for that payroll item.

Your accounting professional might choose to create a journal entry to correct the business financials. However, this type of transaction will not affect the amounts included in the Pay Scheduled Liabilities in the Payroll Center or the payroll reporting forms. Instead, use the Liability Adjustment dialog box for changes to the amounts that are reported as liabilities and to affect federal and state reporting forms.

After reviewing your payroll reports (see the next section), you can adjust payroll liabilities. To do so, follow these steps:

1. From the menu bar, select Employees, Payroll Taxes and Liabilities, Adjust Payroll Liabilities (refer to Figure 11.15).

2. Select the Date and Effective Date. These dates might affect your payroll reporting forms, so specify the date carefully.

3. Select Company if the adjustment is for a company-only payroll item, such as a company-paid health insurance benefit.

4. Select Employee if the adjustment is for an employee-reported liability or if you need to effect a change to the employee’s W2 amounts. Select Class if using this feature in QuickBooks.

5. From the Item Name drop-down list, select the payroll item or items to be adjusted.

6. Enter an Amount (positive or negative).

7. Enter the Wage Base (positive or negative) if the payroll item being adjusted is subject to a wage threshold similar to federal or state unemployment.

8. Enter the Income Subject to Tax (positive or negative) to adjust the amount reported on tax forms.

9. Optionally, enter a Memo.

10. Optionally, click Accounts Affected. The default is to affect liability and expense accounts. If your financials are correct, but the payroll reporting and liabilities are incorrect, select Do Not Affect Accounts. Click OK to close the message.

11. Click Next Adjustment to add an additional record, or click OK to close the Adjust Payroll Liabilities dialog box.

A good practice is to review your payroll reports again after making the adjustments to be certain they provide the result expected.