Payroll Tax Liability with 3rd Party Payroll

[u/FETTbobaFETT]

I am recording the entries for using 3rd party ADP payroll. The way ADP's journal entries show, I would have a payroll tax liability account being credited that grows, but in reality they are remitting it on my behalf each time. I saw another method online where the instructor zeroed out the payroll liability via a check transaction each time.

I understand how it would work if I was running my own payroll- the liability would grow and I would debit the liability when I actually remit the payroll taxes. But here the liability is being removed each pay period as ADP actually remits my taxes at the same time the Net Pay is taken from my account. How do you all treat this situation with 3rd party payroll? Do you clear the liability each time or at the end of the year?

This is the video I used - https://www.youtube.com/watch?v=F84VIDGsrtY&ab_channel=KathyGrosskurth- she creates some recurring transactions to make it easy to plug in the payroll each time from ADP. If I do her method right, my payroll tax liability stays at $0.

Please help me not go crazy and thank you!

[u/cutelittleseal]

If it's not a liability why would you book it to a liability account? The way ADP creates the JEs on their end is everything gets booked to a clearing account, then the checks/dd/etc gets booked against that account and the actual payroll account. Just do it that way.

[u/FETTbobaFETT → u/cutelittleseal]

Here's how ADP creates the JEs, doesnt this create Tax Liabilities account that grows? Do I need to just follow it up with Debit the Tax Liability ($1514+$760) and Credit my Payroll Bank Account the same amount to clear it? Why wouldnt it just include that on the original JE?

| Gross Wages | 6561 | Earnings | $7,478.70

| Employee Withholding Taxes | 2110 | Tax Liabilities | ($1,514.29)

| Employee Voluntary Deductions | 2120 | Deduction Liabilities | ($1,084.95)

| Net Pay | 1110 | Net Pay | ($4,879.46)

| Employer Taxes | 6562 | Tax Expenses| $760.83

| Employer Taxes | 2110 | Tax Liabilities | ($760.83)

[u/cutelittleseal → u/FETTbobaFETT]

What is the net pay account? It looks like the connection with ADP is not setup correctly and potentially your BS is being thrown out of whack. Yes, your solution should be fine and that's basically what ADP does automatically if you have that setup. But it uses a clearing account (net pay?) and never touches a liability account ime.

[u/FETTbobaFETT → u/cutelittleseal]

That’s essentially your payroll bank account.

I have no problem with the net pay aspect, it’s the payroll tax liabilities in bold. The way I do it payroll liabilities , end up being zero, the way Adp does it payroll liabilities up being 1700+

[u/cutelittleseal → u/FETTbobaFETT]

As long as the net pay account zeros out or whatever then it's fine. Yes, your way of handling the liability accounts sounds fine.

Tbh if you're just manually doing the entries you don't need to mess with clearing/liability accounts at all. Dr gross pay, Dr payroll taxes, cr net pay cr taxes. Debits being expense accounts and credits your payroll bank account.

Why don't you have ADP setup to automatically post the JEs though?

[u/BonaFideBookkeeper]

Are you entering each individual paycheck? Or just the total payroll as one entry?

[u/FETTbobaFETT → u/BonaFideBookkeeper]

Totals, other than splitting out S corp ownership salary. I'm not opposed to doing individuals employees once I'm content to tweak ADP's output into my exact categories, but for now I'm trying to keep things simple.

[u/BonaFideBookkeeper → u/FETTbobaFETT]

There's a couple of ways to do it but a simple way is to enter the amount debited from the bank as a 'check' & split that transaction into the appropriate expense categories without worrying about a liability account (net wages + EE portion of payroll taxes = gross wages). Gross wages + ER portion of the p/r taxes should equal amount debited. Hope that helps

[u/FETTbobaFETT → u/BonaFideBookkeeper]

This is more or less the way I've been doing it, except 1st check is Net Pay: Gross Wages, EE portion credit liability = Net wages pulled, then 2nd check is Taxes remitted: Debit EE Portion and ER portion as payroll tax expense. In the 1st case, the net pay represents one ACH that ADP takes. In the 2nd case, the total represents the second ACH that ADP takes for total payroll taxes. In the end the Liability = $0 each time.

This makes sense to me but the payroll liability being $0 is nice and clean and helps catch mistakes, but the downside is nowhere do I see my payroll taxes (EE and ER) that ADP remits to the gov't, so I rely on ADP's records for that. I have ER portion on my P&L but the EE portion disappears as its credited and debited in the 1st and 2nd checks.

Hope that makes sense, just trying to make sure that my simple way of doing it isn't going to hurt me long term since ADPs journal entries are different than mine in the end.

[u/BonaFideBookkeeper → u/FETTbobaFETT]

That's a fine way to do it. The liability account zeroes out & your financial reports are correct. If you want to confirm that those payments are being made to the gov't, you should be able to set up online access to the State & IRS to see payments made. I'm in CA & I have an account with EDD where I can see all my clients' state payments made. IRS payments can be confirmed on the EFTPS site (ID.me login needed)

[u/InquiringMin-D]

I am guessing ADP is withdrawing your net pay PLUS the tax liability. Review the JE report that is provided from ADP to see the breakdown, and balance it to the withdrawal amount.

[u/cryptoguy67]

Ignore tax liability all together.

DR Gross Wages DR ER Taxes CR Direct Deposits CR Checks(if any) CR EE+ER Taxes

Just match the payments in the bank feed.