This is one of my favorite dead giveaways that a company has been working with a subpar bookkeeper, and it’s so easy to spot.
On the P&L, Payroll is shown as “Payroll/Wage Expense” and “Payroll Taxes.” If the ratio of these two number is 9:1, it’s been booked correctly. If the ratio is 6:4, it been booked incorrectly. The reason that this happens is because payroll processors debit the bank account for two amounts, wages and taxes, and they do so in the 6:4 ratio. However, the taxes amount is for both the employer and employees, and the company should report the Gross Wages of the employee and the Company Taxes, as opposed to the Net Wages and sum of Employer and Employee Taxes. If you want to learn more, visit our article on typical startup payroll costs.
QuickBooks Online - Accounting for Payroll Taxes Example
This requires a “Journal Entry” as shown below.
And hopefully you are using what we consider the best accounting software for startups, QuickBooks Online. You can read about why we think this is the right choice for early-stage companies.
Vanessa Kruze, a seasoned CPA, has an impressive track record prior to establishing Kruze Consulting. Her experience includes pivotal roles at Deloitte Tax and as a controller for a substantial startup with over 120 employees and $20 million in revenue. Under her leadership, Kruze Consulting has emerged as a distinguished CPA firm, recognized on the Inc 5000 list for five consecutive years, illustrating rapid growth and success in the competitive accounting landscape. Vanessa's unique approach, combining deep industry knowledge with advanced automation and software solutions, has positioned her firm as a leader in providing comprehensive accounting services to startups across the United States.
