Keeping track of your payroll expense is very important, especially if you applied for a PPP loan. You need to stay compliant with the latest regulations.
Payroll expenses are for compensating employees and contractors in your business. These are also used to hire workers. Processing your payroll requires you to collect and manage data. This means your employer’s payroll expenses are likely to change from time to time.
There are a lot of things you need to consider when managing your PPP loan’s payroll expenses. Here’s everything you need to know.
Defining a Payroll
If you have several employees in your business, you’ll have to do payroll. It’s a great way to stay organized, and there’s no way to avoid it.
A payroll is an amount your business pays for labor for your employees. It’s the total of all compensation you must pay to your employees for a specific period of time and date. This includes salaries, wages, bonuses, and benefits.
It’s a process of paying which includes the tracking of working hours, calculation of employee’s pay, and distribution of payments through direct deposit or check.
What is payroll expense?
Payroll expense refers to the number of wages and salaries you pay to your employees. This also includes the cost of all related payroll taxes, health benefits, and social security.
In many businesses, employer payroll expenses drive the majority of their monthly and yearly expenditures.
It’s very essential to manage payroll expenses on profit and loss. This helps avoid redundancies.
Here are some payroll expense examples that you may see in your PPP loan:
Most of the time, wages are related to employee compensation based on the number of hours multiplied by the hourly rate.
The employee earning hourly wages is paid on a weekly basis that follows the number of hours worked.
US employees working in a company are always paid a salary. And often, it’s given in a bi-weekly payroll period depending on the company.
Salary is always related to employee compensation on an annual basis. For instance, $45,000 per year.
Employers also have a list of payroll expenses in the form of employee benefits. This means providing for employees’ health care funds, retirement funds, social security payments, and other bonuses.
FICA Tax Deductions
Federal Insurance Contributions Act (FICA) is the federal law that requires employers to withhold separate taxes from the wages they pay their employees. FICA taxes are 6.2% for social security and 1.45% for Medicare.
It’s a total of 7.65% of the tax for payroll withholdings.
A Payroll tax is also a payroll expense example. It’s a percentage withheld from an employee’s pay by the employer. It’s paid to the government on the employee’s behalf.
The tax is based on wages, salaries, and some bonuses paid to employees. Payroll taxes are deducted from an employee’s earnings and are paid to the Internal Revenue System (IRS).
State and federal income tax withholdings
Employers must deduct federal state and local income taxes from wages and salaries. It’s the employee’s annual income and the number of allowances specified in their W-4 that determines the amount deducted.
Unemployment tax withholdings
The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) give temporary income for employees who lose their jobs.
An employer’s FUTA is always 6% during the first $7,000 gross income an employee earns. Unemployment taxes vary on each state’s unemployment program.
What percentage of expenses should payroll be?
In most cases, payroll expenses between 15-30% of gross revenue are the safe zone for the majority of businesses.
Payroll that’s more than 30% of gross revenue is one of the most common reasons why some businesses fail.
Yes, payroll is always one of the most important expenditures for an employer. But it’s also the expense that can make or break a business.
Knowing what percentage of revenue to spend on your payroll is the first step towards your business’ profitability. The productivity of your staff along with how your management implements the incentives will play an essential role to increase your long-term revenue.
What are the most common payroll deductions?
It’s important for employers to know that there are always deductions to take out of their employee’s paychecks on a regular basis.
Payroll deductions are withheld from an employee’s total earnings to pay taxes, garnishments, and benefits. Payroll taxes can be voluntary or involuntary. They may be taken out of a paycheck on a pre-tax or post-tax basis.
These are generally processed in every pay period. Calculations can be done manually or automatically through a payroll service provider. Most businesses that choose automation to reduce errors and ensure payments are filed with the proper authorities in a more organized manner.
Here are the 6 common types of involuntary payroll deductions that you and your employees will always see.
Federal Income Tax
The government uses federal tax to pay for the country’s growth and development.
When you pay tax to the American government, it means you’re investing in your economy. The government uses the federal tax for the following:
- Maintaining, repairing, and building infrastructure
- Providing emergency funds
- Benefits for government workers
- Pension funding
- Discovering new feats, such as space exploration
- Improving education, health, agriculture, and public transportation
- Providing food and shelter for the poor
State income tax
State taxes pay your state’s government. The amount depends on which state your business is based in. You can check your state tax here.
The amount each employee owes is calculated depending on their W-4, marital status, and a number of allowances. Some employees don’t have to withhold state income tax if they are paid low wages or have a large number of personal exemptions.
Social security tax
The social security tax is under FICA. This requires employees to provide contributions in every paycheck they receive. The amount to be deducted from an employee depends on their taxable income.
The funds collected for social security pay an employee’s disability fund, retirement fund, and survivor’s benefits.
Just like the social security tax, Medicare tax is also a part of FICA. This helps pay for hospital care, checkups, and doctor fees.
Employers are obliged to pay Medicare taxes to the federal government.
Insurance policy deductions
This is for employees who have their employer-sponsored health, dental, and vision care plans. They will see a deduction of the amount they owe in their pay periods.
Employees can also contribute to their own health savings account. The contribution is tax-deductible and it grows tax-free every year.
Employees also contribute pre-tax funds deducted every pay period for their 401(k) or 403(b) retirement plans.
The 401(k) is a retirement plan that allows employees to save and invest for their own retirement. It’s done on a tax-deferred basis. Only an employer is allowed to sponsor this plan to their employees.
The 403(b) is a retirement plan offered to tax-exempt institutions. These are nonprofits, churches, hospitals, and public schools.
Employers may offer this plan as a part of an employee’s benefits package.
Other Payroll Withholdings
There are other payroll expenses influencing profit and loss. You might see them on your employee’s paychecks. These deductions are always voluntary and have authorization from the employee.
- Retirement plans
- Life insurance premiums
- Job-related expenses
- Union dues
- Charitable contributions
- US Savings bond purchases
- Money owed to your employer
What payroll expenses are included in the PPP?
PPP borrowers ask, “What is included in payroll expenses in the PPP?”
But you need to know first that there were some changes on how you should spend payroll expenses in your PPP loan.
Before, at least 75% of PPP loans must be used for payroll costs, while the remaining 25% goes to rent, mortgage interest, and utilities. This was known as the 75/25 rule.
The PPP Flexibility Act reduced this to 60/40. You are now allowed to spend 60% of your PPP loan for payroll expenses. The remaining 40% goes to other eligible expenses like mortgage interest, rent, and utilities.
Here are the payroll expense examples included in the PPP loan. At least 60% of your PPP loan should be spent here:
This is the total cash and non-cash payments you provide your employee. Compensation is frequently one of the biggest expenditures for businesses with employees. Here the types of compensations that might be in the list of your payroll expense journal entry:
- Base pay
- Sales or productivity commissions
- Overtime pay
- Cash tips
- Bonus pay, merit pay, and referral
- Stock options
- Other non-cash benefits like free lunch and gym membership
Leave of absence
A leave of absence is the time allowed for an employee to be away from work. It’s usually requested by the employee to attend special events happening or personal matters in his life.
Most employers pay for leaves. Employees have the privilege to be compensated with:
- Sick leaves
- Vacation leaves
- Paid holidays
- Paid time off
- Maternity leave
- Paternity leave
- Parental leave
- Rehabilitation leave
- Study leave
Separation pay and final pay
Separation pay is the compensation to an employee who is parting ways with the company for the following reasons:
- Lay off
Some states also require employers to provide final pay to employees. This is the last paycheck an employee will receive upon resignation.
An insurance premium is the number of money employees or employers pay for insurance policies. These premiums cover healthcare, home, life, and vehicle insurances.
Once you sign up for an insurance policy, your insurer will charge you a premium. Failing to pay on the part of the employee or employer will result in the cancelation of the coverage.
Retirement plan contributions
Supporting employees for their retirement is essential. This should reflect in their payroll
Whether the retirement plan is for 401(k) or 403(b), employers under a PPP loan can also include retirement contributions to employees.
State and federal taxes
As mentioned earlier, the federal tax is a payroll expense to contribute to the country’s growth and development. While the state tax pays for your state’s government.
Both of these are also included in payroll expenses for PPP loans.
Payroll liabilities vs payroll expenses
Expenses and liabilities play essential roles in your business’s payroll expense accounting. Yes, these two are included as separate entities in your journal entry. But both of them are connected.
The amount in your expense account pertains to your total payroll amount for the pay period. While the amount in each liability account determines either the amount you owe, the amount deducted from employees, and to whom you must send money.
Your list of payroll expenses represents the total expenditure paid to employees in the form of salaries. The company will record all these expenses in categories.
In the financial statement, the employer payroll expense is presented in the income statement. It will be used to compare with the current financial year’s income
Payroll expenses are classified as a temporary account. It will be closed at the end of the fiscal year.
Employers are obliged to cut the Total Debt Service (TDS) and other Tax when they pay salaries to employees. The payroll expense account gets adjusted with these taxations.
The total salary of an employee will include all the deductions in the payroll expense journal entry.
These are payroll expenses that are due but not yet paid. It’s an obligation deferred until a future date. Your payroll liabilities can also be employee deductions which must be remitted to the IRS and other organizations.
If the employer won’t be able to pay during payday, it will become a payroll liability. The amount owed is usually paid to a third party
The payable account is presented in the balance sheet during payroll expense accounting. It’s composed of permanent accounts and it doesn’t close at the end of the fiscal year, unlike the payroll expense.
The net payroll cost after adjusting all the TDS and tax deductions are in the payroll expense profit and loss account. But when not paid, it becomes payroll liabilities. All these will be under tax duties.
Common Payroll Liabilities
It’s important for employers to be aware of which payroll liabilities they’re responsible for. Because these obligations represent money that must be paid on a future date.
It’s very easy to overlook them. And if not careful, these can cause a business to run out of funds.
It’s normal to have these as your liability. Because the main reason for running payroll is to pay your employees.
Before you pay them, those unpaid wages are classified as liabilities because you owe them to your workers.
Taxes are one of the most common payroll obligations. These are payroll tax liabilities you must withhold:
- Social security tax
- State income tax
- Federal tax
- Medicare tax
When you withhold these taxes, you don’t deposit them immediately to a third-party agency. Instead, they are classified as payroll tax liabilities until your deposit date.
Service Payroll Costs
Taxes and wages are not only your payroll liabilities. If you’re using a system for your payroll, you have to pay for software or a Professional Employer Organization (POE).
There are other types of deductions that you might withhold for your employee’s wages. These are health insurance contributions, retirement fund contributions, and wage garnishments.
How payroll liabilities can be turned into payroll expense
Payroll liabilities can become payroll expenses. An employer accrued liabilities as their employees work.
Most of them pay in arrears. These are money owed that should have been paid later.
Before a salary gets to an employee, it’s considered a payroll liability. But after it gets paid, it becomes a payroll expense.