How to Allocate Payroll Taxes in QuickBooks
Published 06/29/2009 | 
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.
Written by +Ruth Perryman, CMA, CFE, CFM, MBA
Ruth is the president of The QB Specialists, an Intuit Premier Reseller that offers huge savings and expert advice on QuickBooks POS and QuickBooks Enterprise. She is an Advanced Certified QuickBooks ProAdvisor and a member of Intuit’s Trainer/Writer Network. She is also certified in QuickBooks POS and QuickBooks Enterprise and has provided expert QuickBooks help to thousands of businesses all over the world since 1996.
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Hello Ruth,
Is there a way to plug in estimated state taxes though they haven’t been paid yet. An accrual or something?
Hi Sylvia,
If you aren’t using QuickBooks payroll, you’ll either need to enter them as a journal entry or a bill.
Hi Ruth,
This really work! Thank you for the great workaround. I do have one question… if an employer offers a Section 125 Cafeteria plan and the pretax deduction affect SS and Medicare. Is there a way to reflect that in the setup? The setup that you describe works wonderfully for the employees who aren’t taking advantage of the cafeteria plan, but I am having trouble with the 125 plan.
Hi Wendy,
This trick requires a % be entered for the addition/deduction payroll items so you’ll need to calculate the reduced % for each employee.
Unfortunately, it’ll be different for each employee unless they have the same exact salary and section 125 deduction. It’ll also change if there are any changes to the gross pay so you may need to change it each pay period for hourly employees.
Ruth
Allocation of payroll taxes this way really does work! I found that I also needed to make “reciprical” accounts for workers comp in a similar manner to make this work as well. The downside: payroll checks with the allocated amounts will have all of these transactions shown on their pay-stub – a bit lengthy considering two of each for FUTA, SS, Medicare, SUI and in my case, Workers comp. Thats alot of stuff on a check that probably shoul not be in your face and could be very confusing. There would be a bit of “babysitting” as far as keeping rates current.
After setting this up in a new blank company to make sure it worked I can say that it indeed does but I am not so sure I will do it. I will try out the journal entry way as well and decide before I make the plunge.
Hi Ruth,
I have a client that has taken an Owner’s Draw for payroll through November 2011. In December he decided to purchase the Enhanced Payroll module and we have been using it since. In January he over paid estimated taxes for state and federal payroll taxes based on what he paid himself through the combination of owner’s draw and payroll. Question is How do I handle the split of the estimated payments and the over-payment? I know I need to apply a portion of it through the payroll module but how do I handle the remainder? directly into the register? What accounts do I use?
Thanks,
Sharon Smith
QBACIT, LLC
Hi Sharon,
You mention owner’s draw which sounds like your client is a sole proprietor. If this is the case, he shouldn’t be on payroll. Sole proprietors don’t pay income taxes, including the self-employment tax, only on cash taken out of the business (through payroll or owner’s draws). They pay taxes based on the entire net business income reported on their Schedule C, whether its been paid out or not.
Paying estimated taxes (Form 1040-ES) is entirely different from making payroll tax deposits. Form 1040-ES is a personal payment that shouldn’t be paid by the business or entered in QuickBooks. Only payments for payroll tax deposits (reported on Form 941) should be paid by the business. Because sole proprietors should not be on payroll, they usually file Form 1040-ES.
Ruth
Hi Ruth,
Question: in step #4, if we want the Admin payroll burden deducted from the COGS account to be exactly the same as what is being added to the Admin p/r tax expense, must we also add COGS p/r tax expense sub-accounts to match the ones we create in step 3?
Also note – I’m following your workaround in the contractor Sample Company Data. But when I get to step #3, Quickbooks’ EZ setup isn’t allowing me to do any of what is listed in your step #3. And, in fact, the EZ setup didn’t allow me to name the item, and therefore when I “finished”, there was no new item on the list.
I had to use Custom Setup. Maybe this is an issue with the Sample Data…?
Thanks very much for your expertise,
Roseann
Hi Roseanne,
In step #4, you want to map the expense account to whatever account you’re currently using for COGS payroll taxes so it’ll reduce the account balance. If you use a newly created COGS account the account balance will be negative.
You need to use Custom Setup instead of EZ Setup.
Ruth
Thank you Ruth for re-assuring me that the situation is what I thought and for showing me two ways to deal with this. As a renovation contractor, I want to be able to alocate my and my project manager time/cost accurately between office and field.