How to Allocate Payroll Taxes in QuickBooks
New payroll items are mapped to an expense account in QuickBooks called Payroll Expenses, but you can edit your payroll items so they post to any expense account you wish. However, each payroll item can only be mapped to one expense account which causes problems when you want to allocate field labor to cost of goods sold and admin labor as a regular expense.
You can get around this by establishing two payroll items for each of your payroll expenses – one mapped to a cost of goods sold account, another mapped to a payroll expense account – with one important exception, payroll taxes. Because QuickBooks requires that you use one payroll item for each federal and state tax, you are forced to choose between mapping your payroll taxes to an expense account and understate Cost of Goods Sold or a Cost of Goods Sold Account and understate Payroll Expenses.
Many QuickBooks consultants recommend that you prepare a journal entry each month to move your payroll taxes into the correct category. But there is a way to automate this.
1. If you haven’t already, create payroll tax accounts under cost of goods sold and expenses. Go to Lists > Chart of Accounts, click on the Accounts button, and select New. The cost of goods sold type is one of the Other Account Types. You may want to create sub-accounts for each payroll tax. You can do this by creating a parent account called Payroll Taxes, checking the box next to Subaccount of, and entering in the Payroll Tax account when creating the sub-accounts. Note: the sub-account types must match the parent account selected.
2. Go to Lists > Payroll Item List and edit your payroll tax items to map to the Cost of Goods Sold payroll accounts you created above.
3. Click on the Payroll Item button and select New. Create an Addition payroll item called “Allocated Admin Payroll Taxes”. Select EZ Setup, Other Additions, and map it to your regular payroll tax expense account. Don’t change any of the other defaults until you get to Gross vs. Net. Change this to gross pay. You can enter an estimated % for payroll taxes (make sure to enter the % after it) or if you want really accurate job costing you may want to create separate payroll items for each tax so you can set the % and upper limits for each one. Just don’t forget to adjust the upper limits each year.
4. Create a Deduction payroll item called “Admin Payroll Allocated to Admin”. Follow the same steps as you did when creating the Addition payroll items, except select Other Deductions as the account type and map it to your cost of goods sold payroll tax account.
5. Add the addition and deduction items to each admin employee’s Payroll and Compensation Info tab. Note: you must enter the deduction payroll item on top of the addition payroll item, or you will change the amount of net pay.
6. When you create paychecks for these employee in the future, the addition payroll item will increase regular payroll expense, and the deduction payroll item will decrease cost of goods sold by the same amount. You can also edit prior paychecks by unlocking them. Just make sure that the deduction item is ALWAYS listed first.
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.