 In this presentation, we'll go through the process of recording the payment of employees within our accounting system. Note that we're not going to be processing the payroll through the Sage 50 cloud accounting. We'll discuss that briefly. We're going to be assuming that we have a third party vendor such as an ADP or a Paychex. It's helping us to process the payroll. We're going to take their information and then enter that into our systems so it's in our financial statements on our books. Let's get started with Sage 50 cloud accounting. Here we are in our get great guitars practice file. We're currently in the customer and sales section. We're going to be looking at the payroll information. We'll briefly take a look at the payroll information within Sage and then discuss our process. We're going to go down to the payroll employee and payroll information. Now note that the payroll to run payroll through Sage is typically going to be an added feature that you'll have to set up and you want to contact Sage in order to do so. We're going to talk briefly about that setup process in a prior presentation. Now we're going to be thinking about the idea of we're going to assume that we have the payroll done by a third party because we don't want to be adding new features into the system as we go through our practice. Probably we might do a separate course just on payroll within Sage. But for here we're going to assume that payroll is done by a separate party and then we're going to have to add that into our system. And this is going to be a common thing done for many small to mid-sized businesses, even large businesses as payroll becomes more and more specialized of a field. So what we want to think about then is that payroll, we're going to imagine payroll is done by a third party. The larger third party payroll people or companies are something like a paychecks or a ADP. These are two companies that often do payroll for many small to mid-sized companies and they would process the payroll and then the question is, well, how would that work? And we're going to process the payroll but I'm still going to need it coming out of my checking account to pay out of, because we're going to be paying the payroll, right? And we're going to need to put that information into our system in some way. Now they might have some kind of integration to help you to put it into the system and that could work and you'd have to look at that or we might take their information and put it into our system. Bottom line is this, the payroll information, the detailed information we would like to see can be handled by them, right? And then the financial statement information to get our financials right, we would like to have in our system. In other words, oftentimes an ADP or a C or a paychecks or something like that will provide reports, something like this, a registered report. Now this is a very small, just an example type of report. They can be quite detailed because, again, the payroll is quite detailed. But you'll just note what has to be provided to the payroll. So I first want to just think about what has to be provided to payroll, to the employees and then think about what we need to put in our financial system and then how could we do so? So just note that even if you only have a couple of employees, the amount of payroll information is going to get quite complex very quickly because as you know just by the paychecks that we have to provide to the employees, they're going to need the gross pay per paycheck and they're going to need the amount of withholdings which includes social security, Medicare, federal income tax as well as any other kind of benefits and state taxes. And then the net check, they need that not only for the current pay period, but also from a year to date standpoint. So you can see how if you pay people weekly or bi-weekly or semi-monthly, even with like a couple employees, that's going to start to get a lot of data there. So what we would like to do is you might think, well, how about we have payroll or paychecks kind of handle the distributing of the paystubs and tracking all that detailed information. And then in our system, what do we really need on the financial statement side of things? We can think of kind of on our system more of the whole payroll as a one-grouped type of transaction that we're going to put into our system. In other words, we want to think of the total, you know, effect on the financial statements and get that on our financial statements so our financial statements are recorded correctly. And then the detail of the information is something that we might be able to point then to the paychecks or ADP to get that more detailed. In other words, if a particular customer or employee has a question about their particular detailed payroll, hopefully we can point them to the ADP or paychecks. And then we're going to take our general information and put that into the system so that the financial statements are correct. So you can think of kind of like our financial statements as if we had all employees maybe as one employee, right, recording one journal entry for all payroll or something like that to get the financial statements right. And then the detail per employee possibly goes to paychecks. Now, this report is, even if you have this report and your job was to basically take this report and enter it into your system, can be quite complex still. It can be a quite overwhelming type of report. And most people don't understand the payroll. And even if they understand the payroll, they only understand, you know, the processing of payroll and possibly not the debits and credits on how to enter it. So let's just do a quick recap of payroll with a very kind of simple problem, but one that, you know, a simplified problem, not really simple, but simplified for payroll. And then this will help us to kind of think about how we'll construct our journal entry to put into our system. And then in the next presentation, we will do so. We'll put that into our system. So let's just say we have our two employees, just two employees. We've got Adam and Erica. Adam Hamilton and Erica, we didn't put her last name here. I'm going to say Erica Smith. And we're going to say that Adam gets paid, let's say, 55,000. And let's say we pay monthly. So every 12 months in the year. So 55,000 divided by 12 means that monthly, Adams, we're going to pay monthly 4583.33. Now, the social security that we would take from Adam, it's going to come out of his paycheck. So remember, just get this in your mind that Adam is the one that's paying the social security. Even though we're taking it out of Adam's paycheck as the employer, in theory, Adam's the one paying it for it. And again, I say in theory, because obviously this makes an influence on how much we pay Adam and all that. So it's not exactly that Adam's paying it because it's going to affect the whole negotiation process. But in any case, in theory, Adam is the one that's paying the social security. So we're going to say social security is usually going to be this amount times 0.062. And I won't get into the details of that now. That's going to be $2804.17 for our purposes of our practice problem, because in the practice problem, for whatever reason, they've got $258. So I'm going to take out $258 for social security. And then Medicare is usually going to be the gross pay times 0.0145. And then that's $66. We're going to round that to just $66. So $66 is going to be taken out for Medicare. Again, Adam is paying it. This is assumed to what Adam's paying. Then we've got the income tax. This is the federal income tax that we're going to take out. Remember, this doesn't mean our federal income tax. We have to pay federal income tax, too, if we're a corporation or even a pass-through or something. This is the federal income tax of Adam. This is Adam's federal income tax that we're paying. He's going to have to pay on the $1040 at the end of the year, but he's going to pay as he goes here with us and we're required to take the money out. Now, this isn't a flat rate because it's a progressive tax. So it's confusing. We don't know what it's going to be. So we have to have the W-4 and the number of withholding so that we can calculate this in this kind of a mess. So we don't know. We have no idea based on a flat rate. But we're going to say it's going to be $720 right now, and we won't get into the calculations on the federal income tax. You'd have to look at tables and whatnot. So then we're going to say $800 for Erika's going to earn $800 a month. We're going to say then that how much was taken out? Again, it would be usually $800 times 0.062, 6.2%. We rounded it for practice problem to 49. Then Erika's going to have to pay Medicare usually of 800 times 0.0145, 36. And we have here, is that right? This equals this number times 0.0145, which would normally be 11, 60. And we rounded it to 11 for this practice problem for some reason. And then again, the federal income tax is not a flat rate. We'd have to have more complex things involved to figure it out. And then you look at the table, which is basically the number of exemptions and the marital status. So we're going to say $110. So then the amount that's going to be paid, the amount that's come out of our checking account, going to this employee, will then be the $4,583.33, minus the Social Security, minus the Medicare, minus the income tax. And then those are just the federal taxes. They might have state taxes and then like a 401k and that kind of stuff they could come out to. But that's the general idea, right? So we're going to say then the 800 minus the Medicare, minus the federal income tax. So those are going to be then the amounts that we actually pay these two employees. So we still have our portion of Social Security and Medicare. I'm going to think about them separately. But let's, this is one half. And I would think about this as one journal entry of two that we typically need to make whenever we process the payroll. So we're going to say, all right, this is the amount we're actually going to come out of our checking account. And, but they actually earned this amount, you know, and the rest is going to be the payroll taxes. Now we can put this into our system as if it was a total, like one employee, the sum of these, this is the total earnings. This is the total Social Security that was taken out. And this is the total Medicare that was taken out. And this is the total federal income tax that was taken out. So we can think of it kind of like as one employee. And then if I thought about it this way, I would say, well, that would be the total earnings for the one employee minus the Social Security, minus the Medicare, minus the federal income tax, which would be the same as adding these two up, right? That's going to be the 416933. So we could enter this whole thing as if it was just one employee. That's one way we can do it. Now there's a problem with that in that when I do the bank reconciliation, these two amounts are going to come out of my checking account. So I may want to break it out by check, by check so that I can do the bank reconciliation or I can just realize, I can just tie it out to, I can, you know, do that reconciliation as we go and put it in as one lump sum as long as I can track and make sure to do the bank reconciliation. So that's one thing to keep in mind. I'll do this as basically two employees here so we can see the two checks in the bank reconciliation. So let's think about Adam first. What's going to be the journal entry? Typically we're going to say it's going to be payroll, expense, expense. And that's going to be for the gross pay, not the amount that we paid them. And then we're going to have the amount coming out of the checking account, which is going to be the net pay. Obviously that's what comes out of the checking account. There's going to be a difference between the two, which will be the payroll taxes. The payroll taxes are going to come out. We don't get to keep them. We have to pay them to the government. Therefore it's going to go to a liability account, payroll liability, something like that, payroll tax liability. We can have, you know, different categories for social security and Medicare and whatnot, but in essence, it's going to be a liability, right? That we have to pay out. And so now the credits equal the debits and there is, there is that, the credits are not equal in the debits. Hold on a second, that's a problem. We're going to negative sum of these. All right, let's try that again. I think that's going to work now. So there, there are now the debits equal the credits. All right, so let's do the same thing for Erika. So for Erika then, we're going to say, all right, Erika is going to earn the 800, but the amount coming out of the checking account for Erika, which she's actually going to get is going to be 630. The difference is something that we don't get to keep. It's going to be the payroll taxes. Therefore it's going to go into the payroll liabilities of social security, Medicare or federal income tax. So there we have that. These two add up then to that $800. So these two add up to the 800. Now again, you could think of the total as if like all payroll was one employee. That's one way to kind of enter this into the system. So we could say, well, the total earnings for all employees is that gross. And we're going to pay out of the checking account after all checks that we add up, that's the amount that should come out of our checking account. We should be able to tie out to that amount. And the difference is going to be all the stuff that we took out, which is going to be social security, Medicare and income tax for all of them, right? And we can also add across this way. So we can say that this is going to be the payroll expense, the five, three, eight, three, 33. We could add across this way. This is going to be the liability, the one, two, one, four. And we can add across this way. This is going to be the amount that comes out of the checking account. So again, we could just do this with one journal entry like this, put it into our system, and just recognize when we reconcile, we're going to have to add up all the checks that came out and they should tie out to this number. Or we can do it check by check, where we can actually reconcile and tie out each check. So then there's going to be, that's going to be the first kind of component that's the most difficult type of thing. And then we have our portion. This is our portion of payroll taxes that we have to pay over and above as the company. So we're going to kind of like match social security and Medicare. And there might be, and FUTA would be another tax, but I'm just going to do social security and Medicare. So social security, Medicare. And then we'd have to match these. And again, this is a component that a lot of people miss or don't fully understand because we're pretty good at seeing our paycheck and what came out of our paycheck. We all have experience with that. And it's very frustrating that they take all the money came out of my paycheck. And I like earned this amount, but I only got this amount. We all seen that happen, but then we don't get to see it as much the employer side of things, which is the employer paying payroll over and above the gross pay of the employee. And that's going to be the social security and Medicare. So that then I would record as a separate journal entry and I would record it as like payroll tax, expense, expense. And that's going to be equal to, now I'm going to just do this as a lump sum of the total because we haven't yet paid it. I don't have that problem. And that means I'm actually going to put it over here. I don't have a problem of us needing to break out by employee because we're not going to be affecting cash. We're not going to need to reconcile. So I'm just going to put the total over here and then it's going to be going into the payroll liability. It's going to be the other side payroll liability. So there we have that. Now you might be asking, well, why is that the only amount that's in the payroll tax expense when these are clearly payroll tax expenses over here too? And I include it and we didn't put those in the payroll tax expense directly, right? We put them, you know, what happened over here? Well, this went into payroll expense. These amounts basically are payroll taxes, but they're not our payroll taxes as the employer. They're the employee's payroll taxes. And we included them as an employee expense, the payroll expense, right? And then our payroll taxes that we have to pay over and above the employee that are actually taxes that aren't included in the gross pay of the employee, those are the payroll taxes that we might break out into a separate payroll tax expense. So again, a lot of people don't understand that. So that would be kind of what we're going to use. Now we're going to use this information and we'll enter this into our accounting system next time imagining we got this information from an ADP or Paychecks. We're going to take it. We're going to put it into our books into Sage 50. That's going to be it for now. Let's get out of here.