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How to Enter Payroll Prepared by an Outside Payroll Service in QuickBooks

Even though QuickBooks offers several integrated payroll services, many businesses choose to continue using an outside payroll service like ADP or Paychex.  But this often leads to confusion about how to enter payroll into QuickBooks.  Some choose to re-enter the entire payroll in the Employee Center.  Others want to save time by entering it as a journal entry, but don’t know how to enter it correctly. The problem is that the amount deducted from your checking account for payroll never matches up to your total salaries paid.

  • If you  handle your own payroll taxes, the amount you pay your payroll provider is lower than your salary expense because of employee deductions.
  • If your payroll service handles your payroll taxes, the amount you pay is higher because employer-paid payroll taxes are tacked on.

The key to entering your payroll correctly is to understand the difference between gross and net payroll.  Gross payroll is the total amount you pay your employees before deductions.  This is your payroll expense.  Net payroll is what your employees are paid after deductions.  This is a mixture of payroll expense and payroll liabilities that need to be paid sometime in the future–things like state and federal payroll taxes, medical insurance, 401(k) contributions, etc.  These things are not payroll expenses because your employee is paying them rather than you.

Journal Entry if you Handle Payroll Taxes

Memorize the following journal entry and enter it each time you get a payroll report from your payroll service.  You will probably need to add a few accounts.  Salaries & Wages is an expense account, the accounts for the employee deductions are current liabilities:

DebitCredit
Gross Payroll
Federal Taxes Withheld
FICA Withheld
Medicare Withheld
State Taxes Withheld
Employee Medical Deduction
Employee 401(k) Deduction
Any other Deductions made
Net Payroll paid

Account
Salaries & Wages Federal Income Tax FICA Medicare State Income Tax Medical 401(k) Other Deductions Checking Account

When you pay your payroll liabilities, you book the employee-paid portion to the associated payroll liability account and the portion you pay as a payroll expense.  For instance, when you pay your FICA taxes, you’d book half of the amount to the FICA payroll liability account and the other half as payroll tax expense.

Journal Entry if your Payroll Service Handles Payroll Taxes

Memorize the following journal entry and enter it each time you get a payroll report from your payroll service.  You will probably need to add a few accounts.  Salaries & Wages, FICA and Medicare are expense accounts, the accounts for employee deductions others are current liabilities:

DebitCredit
Gross Payroll
Employer-paid FICA
Employer-paid Medicare
Employee Medical Deduction
Employee 401(k) Deduction
Any other Deductions made
Net Payroll paid

Account
Salaries & Wages FICA expense Medicare expense Medical 401(k) Other Deductions Checking Account

When you pay your payroll liabilities, you book the employee-paid portion to the associated payroll liability account and the portion you pay as a payroll expense.  For instance, when you pay your FICA taxes, you’d book half of the amount to the FICA payroll liability account and the other half as payroll tax expense. Still confused?  Consider switching to one of the QuickBooks Payroll Solutions.  Contact me at ruth@theQBspecialists.comfor a free consultation to see which one is right for you.


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This article is provided for informational purposes and is not intended to be construed as legal, accounting, or other professional advice. For further information, please consult appropriate professional advice from your attorney and certified public accountant.

Ruth Perryman - QuickBooks Specialist Written by +Ruth Perryman

Ruth is the an Intuit Premier Reseller that offers great deals on QuickBooks POS and QuickBooks Enterprise. She has provided expert QuickBooks help to thousands of businesses all over the world since 1996.

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2 Responses to How to Enter Payroll Prepared by an Outside Payroll Service in QuickBooks

  • Peter says:

    Hi
    can you please assist me in passing JN regarding the payroll provide by outside service.
    Outsider service have separate bank account here all our employee, ETT, FUTA and tax are ddedcuted from.
    But when they bill us there take out deduction that is contributed by employees. they include net pay n employers contributions and we paid them….

    so the question is how do i entered it in my QB

    100 billed by ADP….

    Payroll expense
    wage

    federal Tax DEBIT

    State tax DEBIT

    State Unemplyoment DEBIT

    State tax DEBIT

    Payroll bank CREDI
    I cant get where to off set epmloyee contribution toward tax…how can i offset set it seen i am not paiding cash for it…it is taken out of employee account and stayes in ADP account..therefore they charge us less of employees dedcution.

    Please help me to JN this entris….

    • Hi Peter,

      I prefer entering this one a check instead of a journal entry. The debits are positive, the credits are negative.

      Employee deductions are credits to payroll liability accounts. Employer taxes are usually entered on the tax payment instead of the wage deduction check. The two checks would look like something this:

      Wage check = net pay
      Wages (positive)
      Payroll liability account (negative)

      Tax check
      Employer payroll tax expense (positive)
      Payroll liability account (positive)

      If you have other deductions, like medical, retirement, etc. they’ll be entered the same way as the tax check. Once everything is paid, the payroll liability account(s) will be $0. The wage check increases the balance in the account, the tax check reduces the balance.

      Ruth