A QuickBooks payroll tip for calculating Workers Compensation when it is based on hours worked.
Workers Compensation Insurance is usually calculated as a rate which is applied to gross wages; and that’s how the built-in QuickBooks Worker’s Compensation feature calculates it. Last week, on the Intuit Community Forum, someone asked how you would set QuickBooks up to track Workers Compensation when it was a rate based on hours worked.
I gave a brief overview on the forum, but thought that it deserved a more detailed “how to” here on our blog.
Before you begin, you’ll need at least three accounts in your Chart of Accounts to track your Liability and Expenses:
- one to track the accruing Worker’s Compensation Liability {an Other Current Liability Account}
- one to track job or field related Worker’s Comp Expenses {a Cost of Good Sold or Direct Labor Costs}
- one to track administrative or overhead Worker’s Comp Expenses {an Expense account}
Next you’ll want to get your Worker’s Compensation rate sheet and using the rate sheet we’ll being adding QuickBooks Company Contribution Payroll items for each different classification code/experience rate.
- From the Lists menu -> choose Payroll Item List
- click the Payroll Item button at the bottom left
- choose New
- select the Custom Setup option
Right click on the image to enlarge it
- click the Next button
- select the Company Contribution option
Right click on the image to enlarge it
- click the Next button
- type in the classification code/experience rate name
- check the option to Track expenses by job {this selection is crucial for job costing}
Right click on the image to enlarge it
- click the Next button
- select your Worker’s Compensation Carrier
- select the Other Current Liability Account for tracking your accrued liability
- select your Cost of Goods Sold or Expense account
Right click on the image to enlarge it
- click the Next button
- in the Tax tracking type window, select None, click the Next button
- on the Taxes window, none of the tax items should be checked, click the Next button
- on the Calculate based on Quantity window you can choose two different methods of calculation:
- Calculate this item based on quantity – use this option if your employees perform work under more than one classification/experience rate during the week. You will have full control of the number of hours that count toward each experience rate.
- Calculate this item based on hours – use this option if each of your employees perform work under only a single classification or experience rate during the week. QuickBooks will automatically calculate the rate based on the total number of Straight and Overtime hours worked.
Using the Calculate this item based on quantity option:
Right click on the image to enlarge it
- click the Next button
- on the Default rate and limit window – in the first box, enter the experience rate for this classification, leave the 2nd field empty, and make sure that you UNCHECK the “This is an annual limit” option
Rght click on the image to enlarge it
- click the Finish button.
Add this company contribution payroll item to each applicable employee’s record.
When using this method, when you are creating the employee’s paycheck you will manually enter the number of hours that the employee worked under each experience rate in the Quantity column, once you enter the Quantity {number of hours} for each experience rate QuickBooks will perform the calculation and display the applicable amount in the Company Contribution section of the paycheck.
Right click on the image to enlarge it
Using the Calculate this item based on hours option:
Right click on the image to enlarge it
- click the Next button
- on the Default rate and limit window – in the first box, enter the experience rate for this classification, leave the 2nd field empty, and make sure that you UNCHECK the “This is an annual limit” option
Rght click on the image to enlarge it
- click the Finish button.
Add this company contribution payroll item to each applicable employee’s record.
When using this method, when you are creating the employee’s paycheck QuickBooks will automatically make the calculations for you by displaying the total number of hours the employee worked against the experience rate in the Quantity column and display the applicable amount in the Company Contribution section of the paycheck.
Right click on the image to enlarge it
When you pay your Worker’s comp do so through the Pay Liabilities option.
We hope that you’ve found this article to be helpful, including Worker’s Compensation costs – regardless of how they are based – is an important part of your job costing.
QuickBooks Payroll, when properly set up, is capable of tracking and including the cost of your General Liability Insurance; as well as many of the other things that costly construction software does automatically – with a little more effort on your part and without the big price tag.
Tracking General Liability Insurance, when it is based on gross payroll, and getting those costs into Job Costing Reports is vital for many businesses, especially the construction industry.
NOTE: The best time to implement this procedure is when your General Liability Insurance Policy period starts.
The following instructions will allow you to track your General Liability Insurance costs when it is based on gross payroll and get those costs into your job costing reports without making complex journal entries. It will also help you be aware of how much your premium payment will be so that you aren’t in for an unwelcome surprise when the bill comes in or your policy is audited.
QuickBooks Setup for accruing the cost of General Liability Insurance
Example:
In our example general liability insurance is calculated at $6.36 per $1,000.00 in wages for field workers – realize that each type of work that you perform could very well have a different experience rate (just like Worker’s Comp).
Step 1:
Come up with a rate per $100 in wages so this can be calculated for each employee with each paycheck, if paychecks are usually less than $1,000.00 per employee per week.
- $1,000.00 divided by 10 = $100.00
- $6.36 divided by 10 = $0.636
If your policy has different experience rates for different work or employee classifications you’ll want to determine this cost for each different rate.
Step 2:
Create an Other Current Liability Account on your Chart of Accounts to track your Accrued General Liability Insurance. From the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left –> click New –> select the radio button next to Other Account Types and choose Other Current Liability from the drop down menu.
Right click on the image to elarge it.
Click the Continue button and add the details for the account.
Right click on the image to elarge it.
Click Save & Close.
Step 3:
Create the Cost of Good Sold and/or Overhead accounts to track the expense to the company. A Cost of Goods Sold account would be used for field workers and an Expense Account for Overhead and Office workers. From the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left –> click New –> select the radio button next to Other Account Types and choose Cost of Goods Sold from the drop down menu – OR – click the radio button next to Expense.
Right click on the image to elarge it.
Click Save & Close.
Step 4:
Create Company Contribution Payroll Items to track the costs while running payroll. From the Lists menu –> choose Payroll Item List –> click the Payroll Item button at the lower left –> choose New –> select Custom Setup –> click Next –> click Company Contribution –> click Next –> type in the name for this item and select the Track Expenses by Job option –> click Next –> choose your General Liability Insurance Carrier –> from the Liability Account drop down select the account you created in Step 2 –> from the Expense account drop down select the account you created in Step 3.
Right click on the image to elarge it.
Click Next –> Tax tracking type should be set to None –> click Next –> Taxes window should have no tax types checked –> click Next –> Calculate based on quantity window select the radio button to Calculate this item based on quantity –> click Next –> Default rate and limit window, enter the amount that you calculated in Step 1 and make sure that the This is an annual limit option is NOT checked. Click Finish.
Step 5:
Add the company contribution item(s) to Employee Defaults so all new employees who are hired will automatically have this item automatically included in their employee records.
From the Edit menu –> choose Preferences –> select Payroll & Employees –> click on the Company Preferences tab –> click the Employee Defaults button –> click into the Item Name column of the Additions, Deductions and Company Contribution section and select the item(s) you created in Step 4.
Step 6:
Add the company contribution item(s) to existing Employee Records in order to calculate your accrued liability when processing payroll.
From the Employee Center, edit each employee record going to the Payroll & Compensation tab –> click into the Item Name column of the Additions, Deductions and Company Contribution section and select the item(s) you created in Step 4.
Calculating General Liability Insurance Costs When Running Payroll
When running payroll you’ll want to open (view) the detail of each employees paycheck –> determine gross payroll ($280.00 + $1,120.00 = $1,400.00 – per the sample paycheck below) –> take total gross and divide it by 100 (1,400.00 divided by 100 = 14) –> enter 14 in the Quantity column next to the company contribution item and click Enter. QuickBooks will then calculate the General Liability Insurance for this employee and display that amount in the Company Summary section.
Right click on the image to elarge it.
By implementing and following this procedure your General Liability Insurance will be included in your Payroll Summary Reports, Profit & Loss, and Profit & Loss by Job Reports. Additionally, your accrued liability will be displayed on Balance Sheet Reports and can be viewed at any time simply by viewing your Chart of Accounts List.
One final note; when it’s time to pay your General Liability Insurance policy premium you will cut the check using the payroll Pay Liabilities function – DO NOT USE the Write Checks feature.
The Balance Sheet by Class Report is new in QuickBooks 2011 and it gives users the option of selecting “Classes” (fund, location, profit center, or other category) as their column/class grouping.
Over the last several days, I’ve been discussing and sharing some information about the limitations of the New Balance Sheet by Class Report available in QuickBooks 2011 which may make using this report unsuitable for some users.
In previous articles:
- QuickBooks 2011 – New Balance Sheet by Class Report – Part 1, we touched briefly on the fact that transactions will have to be entered in a very specific manner and there are many data entry transactions that are not supported by the Balance Sheet by Class Report
- QuickBooks 2011 – New Balance Sheet by Class Report – Part 2, we discussed how accounting professionals and end users would need to change their procedures when creating journal entries so that they were balanced
- QuickBooks 2011 – New Balance Sheet by Class Report – Part 3, we discussed how users and accounting professionals would no longer be able to assign multiple classes to a single paycheck.
In this article, we’ll discuss another one of the limitations that I was disappointed in – that the report could not automatically allocate payroll liability payments to classes.
The Balance Sheet by Class report, when created in either cash or accrual basis, doesn’t automatically allocate payroll liability payment to classes; this causes amounts to show in the unclassified column on the report.
The resolution in the QuickBooks Help file provides pretty clear instruction on how you, as the QuickBooks user or accounting professional, can manually allocate classes to payroll liability checks when you create them. However, you must follow the instructions carefully in order for your Balance Sheet by Class report to be accurate.
If you assigned all of your employees to a single class (Labor), the task is not difficult. However, if you assigned different employees to different classes (Service and Contracts as we discussed in Payroll allocated to multiple classes), then the task becomes more detailed and difficult.
When you have assigned different classes to employees, BEFORE you actually create the payroll liability check, run the Balance Sheet by Class Report – dating it for the last day of the period for which you will be paying liabilities and print it out as you’ll be referring to the amounts that you owe for each class.
NOTE: While becoming familiar with this procedure I discovered that in order to EASILY determine the employee and employer dollar amounts for Social Security and Medicare by class; that you need to have separate accounts for them on your chart of accounts.
Right click on the image to enlarge it.
Next, you’ll go to the Payroll Center (Employees Menu -> Payroll Center OR from the Home Page click the Pay Liabilities icon).
In the Pay Scheduled Liabilities section, select the payroll liabilities that you want to pay.
Click View/Pay.
In the Liability Payment window, review the payment and add line items so that you have one line item per class for each class that you assigned employees to, and using the information from the Balance Sheet by Class report, enter the appropriate amounts for each liability for each individual class.
Right click on the image to enlarge it.
If you have only assigned a single class to all of your employees (Labor) in the Liability Payment window, in the Class column, select Labor for each line item.
Companies that use this report will have to implement strict procedures to ensure the accuracy of the final report and accounting professionals and QuickBooks trainers will need to be aware of these guidelines.
 |
Request our FREE 142-page “What’s New in QuickBooks 2011? eBook, by completing a simple request form.
This eBook will provide you with with all the information I’ve posted here in our blog, plus MORE! Once you’ve completed our simple request form, you’ll have instant access to this 142-page .pdf eBook, designed to be duplex printed and put in a binder for future reference. |
Every contractor, regardless of their business structure (sole proprietor, partnership, corporation) has to choose an overall method of accounting; before the first federal tax return is filed. Accounting methods include:
the cash method- the accrual method
- the accrual method which excludes retentions, and (possibly)
- a hybrid method(s)
Depending on the type, size, and length of the construction contract, there are various methods of accounting for long-term construction projects that are allowed – each method has its own advantages and disadvantages.
A contractor will need to select a specific long-term contract accounting methods – possibly with different methods for it’s exempt and non-exempt contracts – and also selects sub-treatments for the classification of contracts and the allocation of indirect costs.
In a nutshell, accounting for long-term contracts relates to the treatment method that is chosen; or that is required by the rules and regulations of the tax code, in order to account for income and cost recognition for long-term contracts.
10+ Methods of Accounting for Construction Contracts
| Method | Revenue Recognition | Cost Recognition |
|---|---|---|
| Cash | As payment is received | As expenses are paid, except for depreciation and capitalization rules. |
| Hybrid – (Part Cash/Part Accrual | Cash or accrual – depending upon the method selected | Could be cash or accrual. For example, the contractor could use the cash method for receipts and disbursements AND accrual for inventory and payables related to inventory. |
| Accrual | As billing invoices are issued | Based on economic performance regulations of §461(h) |
| Accrual Excluding Retention | Based on when billing invoices are issued OR billings minus retainage deferred under the contract. Recognition of retainages, once entitled to receive |
Based on economic performance regulations of §461(h) |
| Completed-Contract (CCM) | Billings or total contract price once contract is finished and accepted. See 1.460-4(d) for revenue recognition for disputed contracts |
Costs are deferred as incurred. Specific costs are outlined in 1.460-5(d). Once completed, costs are closed out to expense.SG&A costs are expensed as incurred.
See 1.460-4(d) for expense recognition for disputed contracts. |
| Exempt Percentage-of-Completion (EPCM) | Contract price (including change orders) multiplied by percent complete.Percent complete determined by various alternative methods, such as:
|
Based on economic performance regulations of §461(h).Costs determined by 1.460-5(d).
All costs are expensed as incurred. |
| IRC §460(b)Percentage-of-Completion Method (PCM) | Revenues determined by only the cost-to-cost formula | Based on economic performance regulations of §461(h).Costs determined by 1.460-5(b).
All costs are expensed as incurred. |
| IRC §460(b)(3) Simplified Cost-to-Cost Method | Same formula as §460(b), except costs determined as outlined by §460(b)(4) or 1.460-5(c) | Based on economic performance regulations of §461(h).Job costs are direct material, direct labor and depreciation, amortization, and cost recovery on equipment directly used.
All costs are expensed as incurred. |
| Reg. 1.460-4(e), §460(a) Percentage-of-Completion/Capitalized-Cost Method (PCCM) | Use PCM formula as §460(b) with same type of costs for 70%, and use exempt contract method for the remaining 30%. | For 70%, same as the §460 PCM method, the balance of the contract is accounted for by the exempt-contract method. |
| IRC §460 10% Deferral Method | Same as §460(b) above, except that revenues and billings on all contracts with less than 10% complete, determined by the cost-to-cost formula, are deferred until greater than 10% complete. | Based on economic performance regulations of §461(h).All costs are expensed as incurred.
All costs on contracts less the 10% complete are not expensed as incurred, but rather are deferred in an account similar to an inventory account |
