Assigning Payroll Costs to Different Accounts

Q: The only account that I see in QuickBooks for payroll costs is called “Payroll Expense,” which is in the “Expense” account type. But I’d like to assign my payroll costs to different accounts. For example, I’d like “Field Labor” payroll costs to show up in a cost of goods sold account, but “Admin” and “Owner” (and maybe, someday, “Sales”) payroll costs into separate expense accounts. Can I do that in QuickBooks?

A: Yes, you certainly can -- and I encourage all of my construction clients who have employees to do the following (conceptual steps follow): 

The “Payroll Expense” account that you are describing is the initial, default account that QuickBooks provides when you first set up your chart of accounts. If you are a construction company that wants to include direct labor costs in your production costs (so that you can measure the correct gross profit results for your company), just inactivate the default account and do the following:

For gross compensation:

1. Create new accounts for each of the specific kinds of payroll compensation that you want to track.

As you add each account, select the type of account that you want to create. So you will choose a Cost of Goods Sold account type for your direct (“field”) labor, and Expense Accounts for each of the other types of compensation that you want to track (e.g., sales compensation, admin compensation, owner compensation).

2. If you use the QuickBooks payroll module, you will then create new detailed payroll items that link back to the correct accounts. As an example, for direct-labor employee compensation, set up a series of payroll Items that look something like this:
• D/L-regular compensation
• D/L-overtime
• D/L-holiday
• D/L-vacation, etc. (Do this for each additional kind of payroll.)

As a part of the process, tell QuickBooks to “assign” each of these payroll items to the direct labor-payroll tax account.

Then repeat this process for your sales, admin, and owner payroll Items.

For payroll taxes:

1. After you have created the detailed compensation accounts and payroll Items, you will then need to return to your chart of accounts and establish new payroll tax accounts to accompany the compensation accounts. That is, Direct Labor-Payroll Tax (COGS), Sales-Payroll Tax (expense), Admin-Payroll Tax (expense), and so forth.

2. Then you will need to modify your existing payroll tax Items. QuickBooks will allow you to assign the cost for each tax to only one account. To facilitate the assignment of payroll tax costs back into jobs, link the cost side of payroll tax items to the Direct Labor-Payroll Tax (COGS) account that you just established.

3. You will then need to make a simple monthly journal entry to move the sales, admin, and owner payroll taxes into the correct expense accounts, and all will be accurate!

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