So, you want to learn
by Bean Counter's Dave Marshall

Lesson 5
Payroll Records

Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6 Lesson 7 Lesson 8
Bean Counter
One area of your business, even if you're a small business, where you must maintain good records is Payroll. You need to dot your i's and cross your t's in order to comply with all the government laws and regulations and also to protect your business from employee lawsuits. Some people still want something for nothing. This lesson provides samples of common payroll forms and links for obtaining the complete forms and additional guidance and lays out and explains some of the documents, forms, and records used for maintaining your payroll and employee information.

In prior lessons, we discussed some of the forms, documents, government reports, and records needed in order to run and maintain an adequate payroll system. A Payroll System is nothing more than the forms, documents, records, software, and procedures and controls used for monitoring employees, recording employee time, calculating and processing employee checks, and complying with all governmental requirements. The system can include manual as well as computerized operations.

Enough of my ranting, let's take a look at some of the forms and records that make up a Payroll System. The purpose of this lesson is not to provide you with detailed instructions for filling out each line of all the various payroll forms. I have; however, provided you with links where you can find this type of information if you need it. The actual purpose is to make you aware of the various payroll forms and records that a small business owner at least needs to be familiar with.

Employment Application
The whole payroll process starts with your employment application. You should thoroughly check out your employees and any references supplied. In addition, you may want to even hire a service to do a background check (some types of business are required to do a background check).

Need a sample employee application for your business ? I provided a link where you may download a free sample employment application forms.
PDF Employment Application

Form W-4
Have all employees fill out IRS Form W-4, Withholding Allowance Certificate. This form provides the information necessary for properly withholding the correct amount of income tax from your employee's wages. Form W -4 indicates your employee's federal tax filing status (i.e. single or married), the number of exemptions they are claiming for federal tax withholding purposes and any additional money they wish to withhold for federal tax purposes.

If you need a copy of the complete W-4 form click W-4 Form.,,id=97817,00.htm

Need some help instructing employees how to fill out their W-4 form ? Amounts and Instructions provided by the IRS. IRS Online W-4 Instructions

Form I-9
Fill out Form I-9, Employment Eligibility Verification for each employee hired. This form is required and used to verify that every employee you hire is eligible to work in the United States.

To obtain Form I-9 click Employee Verification Form.

Form W-5
All employees that are eligible for the advance earned income credit payments need to file Form W-5 with their employer. This tax benefit available mainly to lower income employees with a child authorizes the employer to include a portion of the employees earned income credit in their paycheck. The employer receives a credit against their employment taxes for all advance earned income credit payments made to any of their eligible employees. This is one area that many small businesses overlook due to the "hassle", but it is the law that any employee that qualifies and submits Form W-5 must be paid these entitled payments.

Payroll Source Documents

Time Sheets

One type of document that a business can use to record and track their employee's time is called a time sheet. The sheet includes the date worked, regular hours worked, overtime hours worked, holiday, sick, or personal hours and any other information you need to properly record and calculate your employee's wages.

Time Card

Another basic document for recording the amount of time an employee works. The time card is used in conjunction with a time clock where the employee enters his/her card to clock in and out and the day and hour are recorded on the card. With the computer age, new innovations such as employee ID cards similar to a credit card are used to track an employee's work time.

We'll use our cashier, Goodwith Cash, from Lesson 3 as an example for our timecard.

Employee Name:Goodwith Cash Employee Number: GC
Department:Cashier Period Ending:Dec 30, xxxx
Date / Day of Week In / Out
Monday Scheduled Off
Tuesday Sick Day
Wednesday 3:00 PM - 7:00 PM   7:30 - 11:30 PM
Thursday 3:00 PM - 7:00 PM   7:30 - 11:30 PM
Friday 3:00 PM - 7:00 PM   7:30 - 11:30 PM
Saturday 12:00 PM - 4:00 PM 4:30 PM - 11:30 PM
Sunday Scheduled Off
Date / Day Of Week Total Hours Regular Hours Overtime Vacation
Monday         Scheduled Off
Tuesday 8.0     8.0 Sick Day
Wednesday 8.0 8.0      
Thursday 8.0 8.0      
Friday 8.0 8.0      
Saturday 11.0 11.0      
Sunday         Scheduled Off
Totals 43.0 35.0   8.0  
  • Other Payroll Source Documents
  • Weekly Tip Reports for all tipped employees.
  • Production / Piece Rate Report for production / piece rate employees.
  • Bonus Report & Calculation for employees entitled to a bonus.
  • Commission Report & Calculations for employees paid based on a commission.

Our Payroll General Ledger Accounts

In order for the section on the Payroll Special Journal to make any sense, you may need some basic knowledge regarding Journals, the General Ledger and its associated Chart of Accounts, and of course debits and credits. If you need to review these topics, they're covered in my free So, you want to learn Bookkeeping! Introductory Tutorial.

We're going to use Ma's Secret Recipe business from Lesson 3 to illustrate recording our entries in our payroll accounting records. Ma's a smart gal so she decided she wanted to keep track of her payroll costs by the type of employees that she needs to help her run her business.

A complete chart of accounts has all our asset, liability, revenue, expense, and equity accounts. In this lesson, we'll only be concerned with our payroll expense and liability general ledger accounts. How do you determine what payroll accounts to set up ? Basically, that decision is up to each owner and depends on how much information you want to have available for analyzing and reviewing your payroll costs. Ma could have used just one account called Payroll Expense where the salaries and wages of all her employees are charged, but by doing this she doesn't have much information available (without doing a special study) for quickly analyzing where she's spending her payroll dollars.

Ma has the following General Ledger Payroll accounts:

General Ledger Payroll Accounts
Account Description Account Number Account Type
Manager Salary & Wages 5001 Expense
Cook Salary & Wages 5002 Expense
Server Salary & Wages 5003 Expense
Support Salary & Wages 5004 Expense
Sales Salary & Wages 5005 Expense
Tip Credit 5010 Expense (offset)
Employer FICA
& Medicare
5011 Expense
Health Insurance 5015 Expense
Uniforms 5016 Expense
Cash-Payroll 1010 Asset
Federal Income
Tax Withheld
2005 Liability
FICA Withheld 2006 Liability
Medicare Withheld 2007 Liability
State Income
Tax Withheld
2008 Liability
Savings Accounts
2009 Liability
Employee Bonds 2010 Liability
Employer FICA
& Medicare Payable
2049 Liability
Accrued Payroll 2050 Liability

Why are some of the accounts in bold letters ?

The Cash-Payroll account is in bold just to emphasize the fact that although not necessary, Ma set up a bank account just to use for issuing all her payroll checks called Cash-Payroll. She could have used her regular checking account if she had wanted to. Ma did this so that all the checks issued for payroll would be drawn on this bank account and this would save her sorting thru her regular bank account to find payroll checks if she needed them.

How does this work ? Ma determines what her net payroll is and then writes a check or transfers funds from her Cash-Regular bank account to her Cash-Payroll bank account. We'll make a general journal entry to illustrate how this transaction is recorded.

What do you think the balance of this checking account should normally be ? Zero !!!! The reason is that the amount we transfer into this checking account is always equal to the total of all the payroll checks that have been written.

Ma's General Journal Entry.

General Journal Page 1
Entry No Date Account Name Post Ref. Debit Credit
1 Dec 30, xxxx Cash-Payroll 1010 5,011.76  
    Cash-Regular 1000   5,011.76
Record Payroll Transfer

Just so you know, we also could have accomplished the same result by using our Cash Disbursements Journal to record the money transferred from our Cash-Regular bank account to our Cash-Payroll bank account.

The Employer FICA Expense and Liability Accounts are in bold to emphasize the fact that as I explained in Lesson 4, Payroll Taxes and Withholdings, employers are required to match and contribute the amounts deducted from their employees wages for social security and medicare. These accounts are the accounts Ma set up to record these expenses and liabilities.

In addition to having our Payroll General Ledger Accounts (Payroll Related Chart of Accounts), we also need to assign all of our employees to a payroll expense account. Ma prepared the following Table that shows what account her employees are assigned and charged to.

Employee Assigned Expense Accounts
Employee Account Number Account Name Position
Fat Chef 5002 Cook Salary & Wages Chef/Cook
Notbad Cook 5002 Cook Salary & Wages Cook
Goodwith Cash 5004 Support Salary & Wages Cashier
Wet Hands 5004 Support Salary & Wages Dishwasher
Good Waitress 5003 Server Salary & Wages Server
Handsome Waiter 5003 Server Salary & Wages Server
Knowit All 5001 Manager Salary & Wages Manager
Betty Baker 5004 Support Salary & Wages Baker
Line Man 5004 Support Salary & Wages Line Helper
Talk Alot 5005 Sales Salaries & Wages Banquet & Sales

Note: In our example we only assigned one payroll expense account to each of our employees. You may; however, allocate (charged) an employee's salaries and wages to more than one payroll expense account if as an example they split their time working in two departments.

As I stated earlier, Ma's pretty slick, but can you think of any additional useful payroll information that Ma might in the future want to think about setting up additional General Ledger Accounts for ? Remember there your books and records and you can make them as useful as you want.

OK - I'll help ! How about ?

  • Overtime Accounts to track how much Ma's spending on overtime.
  • Vacation, Holidays, and Sick Pay Accounts to track how much her employee's are costing her for time off.

Payroll Journal

In my So, you want to learn Bookkeeping! Special Journals Tutorial we discussed the most common types of journals used for recording and summarizing your business transactions; however, the Payroll Special Journal was just mentioned but not illustrated or discussed.

There actually was a madness to my reasoning. Since a whole tutorial (this one) is devoted to Payroll this is where the discussion actually belongs.

For those of you, that didn't take this course (and even those that did), let's review a few points from my Special Journals Tutorial.

A Journal is an accounting record that is used to record the different types of transactions using various source documents. Source Documents are the original sources of information that provide documentation (proof) that a transaction has occurred such as sales invoices (tickets), invoices from suppliers, contracts, checks written and checks received , promissory notes, and various other types of business documents. These documents provide us with the information needed to record our financial transactions in our bookkeeping records. If you recall a transaction is any event or condition that must be recorded in the books of a business because of its effect on the financial condition of the business, such as buying and selling. A business deal or agreement.

Journals are often called or referred to as the books of original entry. The reason is that this is the first place that business transactions are formally recorded. Specialized Journals are journals used to initially record special types of transactions such as payroll, sales, cash disbursements, and cash receipts in their own journal.

You can think of a Journal as a Financial Diary.

  • Why Use Special Journals
  • Groups and records transactions of a like nature. A familiar example is recording all cash received by a business in one place.
  • Saves time with summary and less frequent postings to the General Ledger.
  • Allows a business to have different individuals responsible for different journals thereby increasing internal controls and allocating the record keeping workload.

A Payroll Journal is normally used as the record (special journal) that summarizes the payroll information by pay period and is used to post the summary totals to the General Ledger. Small businesses could use their Cash Disbursement Journal but I recommend you use a special journal for recording your payroll transactions. This provides you with all the information about payroll in one convenient place (your payroll journal).

The Payroll Journal records the expense accounts where salary and wage gross amounts are charged. In addition, all the deductions taken from salary and wages are charged to the appropriate liability or expense offset account.

Let's refer back to Ma and our payroll calculations in Lesson 3. We performed all the necessary calculations for issuing our employees their checks -now we need prepare the checks and record them.

Note:Rather than preparing individual payroll checks, many businesses offer what is called Direct Deposit where an employee's net earnings are deposited directly into their personal bank account.

Our first step is to refer to our General Ledger Chart Of Accounts and determine what accounts we need to use to record our payroll entries in our journal.

Next, we need to summarize and post our payroll transactions in the proper accounting/bookkeeping records.

Following these steps, Ma prepared the following Payroll Journal for her pay period paid Dec 30, xxxx.

  Payroll Distribution To General Ledger Accounts
Employee Check
Payroll Expense
Account Amt



5015 Credit

2009 Credit
US Bond

2010 Credit


5010 Credit

1010 Credit
Fat Chef Dec 30, xxxx
5002 1461.10
76.00 84.39 19.74 146.00 100.00   25.00 25.00   984.97 1000 (X)
Notbad Cook Dec 30, xxxx
5002 888.95
36.00 48.91 11.44 89.00 100.00 20.00       583.60 1001 (X)
Goodwith Cash Dec 30, xxxx
5004 258.00
0 12.90 3.02 26.00 50.00         166.08 1002 (X)
Wet Hands Dec 30, xxxx
5004 221.46
0 10.63 2.49 22.00 50.00         136.34 1003 (X)
Good Waitress Dec 30, xxxx
5003 582.50
34.00 33.02 7.72 58.00 50.00       250.00 149.76 1004 (X)
Handsome Waiter Dec 30, xxxx
5003 283.30
0 14.46 3.38 28.00 50.00       50.00 137.46 1005 (X)
Knowit All Dec 30, xxxx
5001 3500.00
254.00 203.55 47.60 350.00 217.00 25.00 25.00     2377.85 1006 (X)
Betty Baker Dec 30, xxxx
5004 244.65
0 12.07 2.82 24.00 50.00         155.76 1007 (X)
Line Man Dec 30, xxxx
5004 300.00
4.00 15.50 3.63 30.00 50.00         196.87 1008 (X)
Talk Alot Dec 30, xxxx
5005 206.00
0 9.67 2.26 21.00 50.00         123.07 1009 (X)
Period Totals  
404.00 445.10 104.10 794.00 767.00 45.00 50.00 25.00 300.00 5011.76  
    (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X)
Employer FICA &

Period Total
5011 549.20  (X)

2049 549.20  (X)


The journal contains a column for the employee's name, check date and number, payroll expense accounts and a column for each of the various types of payroll deductions. We could have set up a column for all the payroll expense accounts if we had wanted to. Ideally, you should set up a column for each of your general ledger payroll accounts.

Why the yellow highlighted (X) 's ? To emphasize that these totals have been posted from the Payroll Journal to the appropriate General Ledger Accounts. Actual postings to the General Ledger Accounts are not illustrated. This topic was covered in depth in My, so you want to learn Bookkeeping! - Special Journals tutorial.

What about the (X) in the check number column ? This is used to denote that the check and all its information has also been recorded in the Employee's Earnings Record.

You can click on Mom's employee Goodwith Cash (Underlined and Highlighted in Yellow) to demonstrate how the employee's earnings are also posted to Individual Employee Earnings Records.

Why the bold debit and credit in the journal ? Once again, I wanted to emphasize the fact that a business that has employees is responsible for matching the deductions taken from employee wages and salaries for social security and medicare. The (X) 's denote that this entry for employer taxes has been posted to the General Ledger.

Just for fun, let's see if the total of our debits equal the total of our credits. I know, adding up columns of figures is not really my idea of fun either.

Account Account
5001 Manager Salary & Wages 3,500.00
5002 Cook Salary & Wages 2,350.05
5003 Server Salary & Wages 865.80
5004 Support Salary & Wages 1,024.11
5005 Sales Salary & Wages 206.00
Total Debits   7945.96
Account Account
2005 Federal Income Tax Withheld 404.00
2006 FICA Withheld 445.10
2007 Medicare Withheld 104.10
2008 State Income Tax Withheld 794.00
5015 health Insurance 767.00
2009 Employee Savings Accounts 45.00
2010 Employee Bonds 50.00
5016 Uniforms 25.00
5010 Tip Credit 300.00
1010 Cash-Payroll 5011.76
Total Credits   7945.96

Sure enough, our debits equal our credits ! Don't tell me, I already know. I left out the special entry recording the employer's share of social security and medicare in my above table. I did this because I wanted to first verify that my actual payroll check entries were recorded and balanced correctly. You can easily see that the debit and credit entries for the employer's FICA and Medicare taxes. The amount of $549.20 was debited to Account 5011 - Employer FICA & Medicare and the same amount was credited to Account 2049 - Employer FICA & Medicare Payable. How did we arrive at the total of $549.20 ? Simple- we added the amounts deducted from all employees for social security and the total amount deducted from all employees for medicare.

Social Security Deducted from Employees 445.10
Medicare Deducted from Employees 104.10
Total Employer Payroll Taxes 549.20

Payroll Distribution

Account Name Employee Employee
5001 Manager Salary & Wages Knowit All 3500.00  
5002 Cook Salary & Wages Fat Chef
Not Bad Cook
5003 Server Salary & Wages Good Waitress
Handsome Waiter
5004 Support Salary & Wages Goodwith Cash
Wet Hands
Betty Baker
Line Man
5005 Sales Salary & Wages Talk Alot 206.00 206.00

What we just did is referred to as Distributing the Payroll or Payroll Distribution. No I don't mean handing out the checks. Fortunately, Mom only has ten employees. Distributing (assigning wages to the General Ledger Payroll Accounts) can become a time consuming task if a business has a lot of employees. What tool might make this task easier ? Good Payroll Software. Not only will good software distribute the wages, but also perform all the payroll calculations, print checks, and provide you with the reports and information needed for governmental agencies.

If you were wondering where the amounts came from in our Payroll Journal presented earlier this is how we got them.

On pay day which of these two employees would you rather deal with ?

I don't know about you; but, I'd much rather deal with the guy on the left. Below is one of the main reasons people work for you and believe me it better be correctly calculated.

Payroll Check

Ma's Secret Recipe
Payroll Checking Account
1000 Anywhere St
Anywhere City, Anywhere State xxxxx
Check Number:1002
  Date:December 30, xxxxx
  Pay To The
Order Of Goodwith Cash        $162.26
  One Hundred Sixty Two and 26/100 ---------Dollars
Some Where National Bank
  Ma's Signature
Special Routing Codes  

Not illustrated, but which should be given to each employee along with their check is a recap of their earnings and all the deductions made to arrive at their check amount. This recap is normally attached at the top or bottom of the check and perforated so that the employee can detach and save what is commonly referred to as their pay stub.

Employee Earnings Records

In addition to our Payroll Journal, a detailed earnings record or subsidiary ledger is maintained for each employee. For illustration purposes, we'll use partial payroll data for our employee Goodwith Cash. The earnings record contains general information about the employee such as their name, address, social security number, marital status, pay period, rate of pay, and job position. The information highlighted in yellow is the general information section of the earnings record.

The other section (non highlighted) of the record is used to record all the payroll checks issued to an employee and what earnings and deductions were used in calculating the net amount of the check.

The record is summarized by Quarter and for the Entire Year. Why summarize by Quarter ? Remember those quarterly tax reports we discussed in Lesson 4 -Payroll Taxes and Withholdings ? These records provide the needed information.

Why summarize for the Year ? We need this information in order to prepare our employee's W-2's.

The earnings record is also used as an aid in calculating any tax where a maximum earnings limit is used in the payroll calculation such as medicare and federal and state unemployment.

Employee Social Security
Pay Period Pay Type Rate / Amount Position / Job Marital Status
& Allowances
Goodwith Cash 999-99-9999 Weekly Hourly $6.00 Cashier / Hostess M-2 999 Some Street
Somecity, Somestate 99999
Date Gross Earnings Social Security Medicare Income Tax State Tax Medical Insurance Net Pay Check Number YTD Earnings
Quarter 1
Actual Weekly Payroll Checks (Not Shown)
Totals Quarter 1
  3250.00 201.50 47.13 200.00 325.00 650.00 1826.37   3250.00
Quarter 2
Actual Weekly Payroll Checks (Not Shown)
Totals Quarter 2
  3600.00 223.20 52.20 250.00 360.00 650.00 2064.60   6850.00
Quarter 3
Actual Weekly Payroll Checks (Not Shown)
Totals Quarter 3
  3500.00 217.00 50.75 225.00 350.00 650.00 2007.25   10350.00
Quarter 4
Prior Periods 2792.00 173.10 40.48 240.000 279.00 450.00 1609.42 Various 13142.00
Dec 9, xxxx 300.00 18.60 4.35 25.00 30.00 50.00 172.05 885 13442.00
Dec 16, xxxx 400.00 24.80 5.80 35.00 40.00 50.00 244.40 905 13842.00
Dec 23, xxxx 250.00 15.50 3.63 0 25.00 50.00 155.87 950 14092.00
Dec 30, xxxx 258.00 16.00 3.74 0 26.00 50.00 162.26 1002 14350.00
Totals Quarter 4
  4000.00 248.00 58.00 300.00 400.00 650.00 2344.00   14350.00
Year To Date (YTD)
  14350.00 889.70 208.08 975.00 1435.00 2600.00 8242.22   14350.00

We could have included additional columns with additional information in our employee's earning record. In all my tutorials I try to stress the fact that your records are yours and you can tailor them to suit your own needs.

Ideally your earnings records should have a column for each type of deduction that you normally deduct from your employee's wages.

Other Useful Information that we could have included:

  • Actual Hours - Straight Time and Overtime
  • Straight Time Earnings & Overtime Earnings
  • Tips Reported for tipped employees
  • Bonuses
  • Sick Pay
  • Holiday Pay
  • Vacation Pay

Why would you add a column for vacation pay ? By doing this, you can easily determine how much you paid an employee for vacation days not worked. What would you have to do if you didn't have a column for vacation pay and wanted to know how much you paid an employee for vacation time ? Probably spend a lot of time searching thru and analyzing time cards or time sheets.

Summary Earnings Record
In addition to maintaining an earnings record for each employee, you should also have a summary earnings record that summarizes the total amounts of all your earnings record columns for all your employees.

W-2's and W-3 Forms
Of course, at the beginning of each new year, W-2's must be prepared and given to all your employees that worked for you at any time during the prior year. Do you recall where we get the information for completing the W-2's ? The Employee Earning Records right ? Form W-3 is used to summarize all the amounts on all the employee's W-2 Forms. Most of you are probably already somewhat familiar with the W-2 form. A copy and instructions are provided below.



Instructions provided by IRS for completing W-2's and the W-3 Transmittal Form Instructions

Although smaller companies can still prepare manual W-2 's, the IRS requires larger companies to file electronically (computer media, disk, etc.) It appears that in the future, even smaller businesses will be required to electronically file.

Employer W-2 On-line Reporting & Help
One option for submitting W-2's that many small businesses don't realize is available is online reporting provided by the Social Security Administration on their web site. In order to use this tool, you must register and obtain a user name and password.

Payroll Files

What do you do with all these payroll forms, documents, and records ? You do my least liked business task, filing. We may not like it, but it's a necessary evil. You should maintain an Employee File for each of your employees and keep it updated with copies of any forms and documents applicable to the employee. In addition, you should also maintain a Company Payroll File that includes a copy of any payroll forms, documents, and records required by governmental laws, rules, and regulations. This file may also include any general company payroll policies and procedures.

Employee File

What are some of these employee documents ?

  • Employment Application
  • Employee Performance and Pay Raise Reviews
  • Employment Contracts and Agreements relating to pay rates and work hours.
  • Authorizations for deductions taken from wages that the employee approves.
  • Employee's W-4 Withholding Allowance Form
  • Employee's W-5 Advanced Earned Income Form (If eligible)
  • Employee's I-9 Employment Eligibility Form
  • Attendance Records
  • Job Description
  • Accident and Injury Reports
  • Lay Off Slips ((If applicable)
  • Reprimands
  • Awards and Special Achievements
  • Time Cards & Sheets
  • Tip Reports (If applicable)
  • Commission Reports
  • Earnings Record
  • Bonus Calculations
  • Garnishments

Company File

What are some of these company payroll documents ? We discussed most of the government required forms in prior lessons.

  • Form 941 Quarterly Payroll Tax Reports
  • State Unemployment Reports
  • Form 940 Federal Unemployment Tax Reports
  • Workmen's Compensation Documents
  • Copy of Company Employee Manual (If you have one)
  • Job Descriptions
  • Fringe Benefits Documents
  • Union Agreements (If applicable)

The prior listings are not all inclusive and are only intended to provide you with a general idea of what records you might want to include in your Payroll Files.

Payroll Software

With the cost of payroll software so reasonable, I encourage you to acquire a good payroll program as one of the ingredients to your payroll system.

Record keeping - ugh ! In this lesson, the types of forms and records an employer needs to prepare and maintain were illustrated and discussed. Maintaining and keeping up with all the forms and calculations manually can be a nightmare. If you haven't already, I really do recommend that you harness and tame the power of a computer and software to make your payroll tasks easier and less time consuming - even if you only have a few employees.

Do you recall that in Lesson 3 - Calculating Payroll, I asked the question "What About Ma" ? In our next Lesson - Self Employed we'll answer this question.

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