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The Payroll Mistake We See Over and Over Again (and How to Fix It!)

At Sand Dollar Bookkeeping, we love helping small businesses stay on top of their financials. But there’s one payroll mistake we see over and over again when reviewing books:


Incorrectly categorized payroll entries.

It’s a common issue—and one that can throw off your income statement and balance sheet, create inaccurate expense and liabilities reporting, and leave your financials out of sync with filed payroll tax returns.

Let’s break down what’s happening and how to fix it.


What Actually Comes Through From Payroll?

Most payroll providers (like Gusto, ADP, and Paychex) send over payroll transactions in two main bank debits:


  1. Net Wages / Net Direct Deposit – the total amount deposited into your employees’ accounts

  2. Net Tax – the amount paid to federal and state tax agencies, which includes both employer-paid and employee-paid payroll taxes


The Mistake We See Time and Time Again

Many business owners mistakenly code:

  • Net Wages as “Wages Paid”

  • Net Taxes as “Employer Taxes”


While it may seem reasonable, this categorization is incorrect.

Here’s why:


  • Net Wages represent only what the employee takes home after withholdings. It’s not your full wage expense.

  • Net Taxes include both the employee withholdings (already deducted from gross wages) and the employer-paid portion. Coding this entirely to "Employer Taxes" overstates your tax expense.


Why It Matters

When payroll is recorded incorrectly:

  • Your wage and tax expenses are misstated

  • Your income statement does not reflect true payroll costs

  • Your books may not align with your quarterly and annual payroll filings

  • Your ability to make informed financial decisions (or apply for funding) can be compromised


And if you’re in a tipped industry—like hospitality, salons, or certain service businesses—there’s more to consider.


A Quick Note on Tips

Tips are generally not a cost to the business. They are paid by your customers and passed through to your employees. If tips are processed through payroll, your accounting workflow needs to reflect that correctly.


How to Fix It

Here’s what we recommend:

  • Check your integration settings. If your payroll service syncs with QuickBooks Online, make sure the mapping is accurate. The right wage and tax types need to flow into the correct accounts.

  • Review your payroll summary reports. Look at your provider’s reports for each pay period and reconcile them with what’s in your books. Gross wages, employer taxes, and withholdings should all match.

  • Contact us. If you're not sure where to start—or realize this might already be a problem—we can help review your file, fix the entries, and create a consistent payroll workflow moving forward.






 
 
 
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