The first thing to do is to set up your Chart of Accounts correctly. QB's default is to lump all Payroll Liabilities and all Payroll Expenses into one account (each). This tells you nothing on your Balance Sheet and your Profit & Loss Reports, so set them up using SubAccounts as follows:

At your Chart of Accounts, click on the bottom button, Account, select New, for Type select Other Current Liability, and Name the account Federal Tax, click the box for SubAccount of and enter Payroll Liabilities. Do this for each of these payroll liability items: Social Security, Medicare, Workman's Comp (or for Washington use Labor & Industries), State Tax (if applicable), Employment Security, FUTA (Federal Unemployment Tax). This is also the place to insert accounts for IRA deductions, Child Support Deductions or the employee portion of medical insurance payments.

Then do the Payroll Expense accounts the same way, making each new account a SubAccount of Payroll Expenses. Create these new accounts: Wages, Social Security, Medicare, Employment Security, L & I or Workman's Comp, FUTA. This is also the place to insert an account for IRA contributions.

Once the Chart of Accounts is completed, you can start setting up the Payroll Items correctly. Each payroll item is already setup to send the deduction to the default Payroll Liabilities or Payroll Expenses account, so you need to change all the ones already set up to go to your newly created SubAccounts. For instance: Salary, when you double click on that Payroll item and hit Next, you'll see that the default expense account selected is Payroll Expenses. Change this to be the SubAccount of Payroll Expenses called Wages. Do this for each of the existing payroll items.

After you've reassigned the existing payroll items to the new SubAccounts, set up your first employee, being sure to choose the state in which you reside. This will trigger QB's to create your state appropriate income tax, workman's comp and employment security payroll items. Keep in mind that these new items will likely default to Payroll Expenses (just like the others did), and you may need to go back to the Payroll Item list and reassign them to the appropriate SubAccounts.

Note for Washington State Users: Washington State is the only state in the union that calculates Workman's Comp on an hourly basis (every other state uses a percentage of the gross pay), so you'll need to create L & I payroll items as follows: In the payroll item list, click on the bottom button Payroll Item, select New, select method for setup Custom, hit Next, select Deduction hit Next, name it L & I Emp Clerical (or whatever your L & I code is, as you may have several), then click Next and enter the name of the agency you pay this to, which is Department of Labor & Industries, next line is Enter the number (and this is not necessary), the next line is Liability Account, so code this to the SubAccount of Payroll Liabilities, which is Labor & Industries. Do the same for the Company portion of L & I, making it a Contribution instead of a Deduction, and coding it to the payroll expense account for Labor & Industries. Keep in mind when you're entering your employee deduction rate that the State's rate sheet tells you what your WHOLE rate is, and what your employee deduction can be. So when you figure your Company portion for insertion in QuickBooks, it is the difference between the two items. For instance: The Company Rate is $.7435 and the Employee portion is $.2345, then the Company Contribution you put in QB's is $.509. Enter the rates in this format: .509 (which represents a little over 50 cents). Be sure to select the button based on "Net Pay", and the button to "Calculate this item based on Hours".

Then continue to create your own payroll items for any not currently there, being sure to code each of them to the appropriate SubAccount of either Payroll Liabilities and Payroll Expenses, creating new ones as necessary.

QuickBooks offers a $199 a year subscription to it's payroll tax tables, and I have created an Excel spreadsheet to help you do payroll manually, in the same format as QB's presents it on the screen. Once customized, the user only has to enter the hours and the federal tax from the Circular E mailed out by the IRS each year. Feel free to Visit My eBay Store: Auction Website and check out the spreadsheet for yourself.

If you found this guide helpful, please mark the appropriate box below. Thank you! Judi aka Mooncaat