Confused About Payroll Deductions and Payroll Liabilities?

Are you confused about payroll deductions and payroll liabilities?  If so, don’t feel alone!  They can confuse a lot of people.  Here is a question that was asked and discussed in a bookkeeping group that I belong to.

Payroll Deduction Question:

Employee has voluntary disability deducted from pay.

This is not a liability for the employer to remit…how do I enter this?  Expense sounds weird for this situation.

Have you run into a similar situation?  If so, here are some basic rules and procedures.

Answer:

Once an employee gives an employer authorization to deduct something from his paycheck (health insurance contribution, union dues, child support, etc.) it becomes the employer’s liability (responsibility) to make sure that the money is deducted and sent on it’s merry little way.

If the employer is deducting this from the employees paycheck, they are agreeing to remit the money to the disability insurance company (so the employee doesn’t have to write the check himself).

Because of the arrangement, the Deduction item that you create in  your QuickBooks Payroll Item List should be pointing to a Liability account on the company balance sheet.  I usually add a sub-account under Payroll Liabilities for this (makes it stand out) and then pay the money to the insurance company through the Pay Payroll Liabilities function.  It works just like a Child Support deduction or a tax garnishment.

These items are not really “company expenses” so they should NEVER hit a Profit & Loss Report

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Now that is a fairly straightforward example of a payroll deduction that has absolutely nothing to do with a companies expenses.  Let’s look at a couple of other examples of how to handle an employee payroll deduction that involves a reimbursement to the company for something that the company REALLY did pay and was, therefore, could be considered a legitimate company expense.

Let’s say, for example, that Larry (an employee) wanted a specific tool for his own use – if he bought it himself it would cost him $1,000.00.  If the company order this same tool, they would only pay $700.00.  Larry makes an agreement with Joe (the owner of the company) for the company to purchase the tool and Larry would repay the company through a payroll deduction.  Not so straightforward is it?  Let’s complicate this a little more; and say that Larry and Joe agree that Larry would repay the $700.00 over the next 4 weeks at $175.00 per week.

There are two ways that you could record the company payment for the tool:

1.  You could set up an Employee Loan account – this would be an Other Current Asset account on your Chart of Accounts, and then create a sub-account for the loan to Larry.  When Amy, the bookkeeper, recorded the bill for the tool she would use the Expenses (or Accounts) tab and select the Loan account she created in the Chart of Accounts.
2. When Amy recorded the bill, she could use the Expenses (or Accounts) tab and select the normal Tools expense account.

Tracking the repayment through a Payroll Deduction:

Amy would then track the repayment of the loan for the tool just like any other Advance or Loan Repayment.  The major difference would be the account on the Chart of Accounts that she would choose depending on how she originally recorded the bill for the tool.

I hope you found this article to be helpful – if so please take a moment to either leave a comment or share it on your favorite social media platform.