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Payroll Item Primer

To accurately calculate and track any transactions related to your payroll, QuickBooks Payroll depends on payroll items. Incorrect or incomplete setup of payroll items is a leading cause of problems when running payroll and paying payroll liabilities. Use this primer to refresh your knowledge of payroll items or to learn more:

• Understanding the concept of payroll items
• Learning about specific payroll items
• Adding a new payroll item (or editing an existing one)
• Specifying tax tracking types

Understanding the Concept of Payroll Items

A payroll item is an object that QuickBooks uses for payroll calculations and reporting. Everything you track on a paycheck is tracked with a payroll item. These include hourly wages; salaries; sick time; vacation time; federal, state, and local taxes; employee and company 401(k) contributions; garnishments such as child support; benefits; and so forth. Payroll items are also needed for non-taxable items such as mileage reimbursements and employee loans, if you track those through payroll. When you create any kind of payroll transaction in QuickBooks—whether it's a paycheck, a payroll tax payment, or an adjustment—QuickBooks tracks the transaction using its payroll items.

Learning About Specific Payroll Items

There are seven types of payroll items: Wage, Addition, Deduction, Company Contribution, Federal Tax, State Tax, and Other Tax. Normally you set up payroll items first when you go through the Payroll Setup Interview. You can also add them later as your needs change.

Wage payroll items. Hourly wages, annual salaries, commissions, and bonuses are called wage payroll items.

Note: Tips are also earnings, but are tracked as additions.

You need an hourly wage payroll item for each type of hourly wage you want to list on a paycheck. For example, you may need hourly wage items for regular, overtime, sick, vacation, or holiday pay. When you set up an hourly wage item, you do not specify the pay rate. Instead, you enter the rate when you add the item to an employee setup or add the item to a payroll check. You can apply the same hourly wage item to many employees even though they receive different rates of pay.

You need a salary payroll item for each type of salary you want to list on a paycheck. For example, you may want to set up separate salary payroll items for regular salary, sick salary pay, and vacation salary pay. In addition, for income tax purposes, some companies may need to track the salaries of company officers separately from the salaries of regular employees. Once you have created a salary payroll item, you can apply it to multiple employees, even though each employee's salary is different. Set the actual annual amount in each employee's payroll record, or in the paycheck amount when you write a paycheck.

Similarly, if you pay your employees on commission, you can set up one or more payroll items to track the commissions you pay. And if you pay your employees bonuses, you can set up one or more special payroll items to track the bonuses you pay.

Addition payroll items. You must set up a separate payroll item for each type of addition you need to make to gross or net pay. Examples of payroll additions include tips, expense reimbursements, travel advances, and other additions to gross or net pay.

Deduction payroll items. You can also create payroll items for each payroll deduction from gross or net pay. Examples of payroll deductions include union dues, loan repayments, employee-paid insurance, and employee contributions to a 401(k) plan. Within the setup for deduction payroll items, you can indicate a rate and a cap on the amount of the deduction, such as the annual limit for employee contributions to a 401(k) plan.

Company Contribution payroll items. You must create a separate payroll item for each company-paid benefit or other payroll expense you want to track with each paycheck. Examples of company-paid benefits and expenses include health or life insurance paid by the company and company contributions to a 401(k) plan.

Federal Tax payroll items. QuickBooks creates the following federal tax payroll items for you: federal unemployment, federal withholding, advanced earned income credit (AEIC), Medicare company (the portion paid by the employer), Medicare employee (the portion deducted from the employees' paychecks), Social Security company (the portion paid by the employer), and Social Security employee (the portion deducted from the employees' paychecks).

State Tax payroll items. For each state where you withhold state income tax, you need to set up a payroll item. QuickBooks tracks each state tax separately, so you know exactly how much you owe for each tax and each state.

You also need a payroll item for each state to which you pay unemployment insurance and disability insurance. If you pay state unemployment insurance or state disability insurance as a company expense and also withhold it from employee earnings, QuickBooks helps you set up both payroll items at the same time.

Other Tax payroll items. You need to set up a payroll item for each miscellaneous state or local payroll tax you pay, such as California's Employment Training Tax (ETT), the Indiana County tax, or city taxes. You can choose from the QuickBooks list of common miscellaneous state and local taxes, or you can set up taxes that aren't on the list.

Adding a New Payroll Item (or Editing an Existing One)

When you change something in your business that affects how your employees' paychecks are calculated, you need to create a new payroll item or edit an existing payroll item. For example, let's say you start offering health benefits and you want to deduct your employees' contribution from their paychecks. You'd need to set up a new payroll item to track the health benefits deduction.

If certain conditions change, you may want to change a payroll item. For example, your company might be assigned a new rate for state unemployment tax, the annual limit for a retirement plan deduction could change, your health insurance rates could change, or your accountant might want you to assign an item to a different liability or expense account.

To add a new payroll item or edit an existing one:

1. From the Employees menu, select Payroll Item List.
2. From the Payroll Item menu button, select New (or Edit Payroll Item after selecting the item you want to edit).
3. In QuickBooks 2005 and 2004: Select Custom Setup, and click Next.
4. Follow the onscreen instructions to enter the appropriate information.
   
   Important: It is very important that you choose the correct tax tracking type for addition, deduction, and company contribution payroll items. The wrong type will affect your tax calculations and payroll forms. If you are not sure what type you should select, consult your accountant or tax advisor, or read about it in Publication 15, (Circular E), Employer's Tax Guide from the IRS.



5. When you are done, click Finish.

For more information, see the topics "Setting up a common payroll item" and "Adding payroll items" in QuickBooks Help.

Specifying Tax Tracking Types

Addition, deduction, and company contribution payroll items all have tax tracking types you can select (other items are predefined and cannot be changed). These types determine what impact the payroll item has on taxes and tax forms. It's very important to specify the correct tax tracking type from the beginning. If you're not sure what tax tracking type a particular payroll item should have, consult your accountant or tax advisor.

• View tax tracking type: To find out what tax tracking type your payroll items have, run a Payroll Item Listing report. From the Reports menu, select Employees & Payroll, then Payroll Item Listing. The Tax Tracking column lists each payroll item's tax tracking type.
• Discover the tax implications: To find out the tax implications of a particular tax tracking type, open a payroll item that is an addition, deduction, or company contribution. Click Next until you reach the Tax Tracking Type screen. When you select an option from the drop-down list, QuickBooks displays a summary of the payroll item's impact on taxes and tax forms.