Start with one pay run, not the whole month
Do not try to explain the month’s balance in one step. Take a single pay run and put two numbers side by side:
- the credit to payroll clearing from the payroll journal entry;
- every bank line for that run: net pay, the tax draft, and any fee.
They must be equal. The pay run where they are not equal is your answer. The five causes below are in the order they usually appear.
1. Was net pay booked against gross?
The entry credited clearing for gross wages, but the bank only paid net pay. The difference is the amount withheld from employees. The credit to clearing must equal the cash the provider pulls, not the gross.
2. Where did the tax draft go?
Most providers pull two amounts: net pay, and a separate draft for taxes. If the tax draft was coded straight to payroll tax expense, clearing is off by exactly that draft, and payroll tax expense is overstated by the same amount: the withholdings were never an expense, and the employer taxes are now counted twice.
3. Are employer taxes on both sides?
The entry debits employer tax expense and credits clearing, but the bank line for those taxes was coded somewhere else. Or the reverse: the bank line went to clearing and the entry never included the employer portion.
4. Is it only timing?
Payroll dated the 30th with cash leaving on the 2nd leaves a balance at month end. That is money owed but not yet paid. It clears when you look at both months together. Write it down when you close the first month.
5. What sits outside the payroll report?
A provider fee pulled with the payroll. A direct deposit that was returned. A check that was voided and reissued. A retirement plan payment sent separately. None of these is in the wage report, and each one moves cash.
What does the clean entry look like?
Example numbers: gross wages 10,000.00, employer taxes 800.00, cash pulled 10,800.00.
| Account | Debit | Credit |
|---|---|---|
| Wages expense | 10,000.00 | |
| Payroll tax expense | 800.00 | |
| Payroll clearing | 10,800.00 |
Then every bank line for the run is coded to payroll clearing, and it nets to zero. If something is paid later and separately, credit a liability for that part and reduce the credit to clearing by the same amount.
For the idea behind this account, see what a clearing account is.
How does this look at close?
In LedgerDock a payroll summary is imported through Payroll Clearing, and the month cannot lock while that account holds a balance, unless you write the reason into the close. See the four checks before a lock.