What is a settlement transaction?

When you approve a payroll, Wave creates a journal transaction on your Transactions page that records all of the expenses and liabilities related to that payroll. Once you’ve paid your employees, Wave will create a settlement transaction to your "Wave Payroll Clearing" for the amount you are paying your employees. Finally, when the direct deposit withdrawal from your bank account imports into Wave, it will automatically be categorized as a transfer to the "Wave Payroll Clearing" to show that the funds have cleared. 

How does it work?

The moment you click Approve Payroll in Wave, your business incurs whatever expenses and liabilities are related to that payroll. These are automatically recorded in a journal transaction that debits each affected expense account and credits an account called Payroll Liabilities.

Crediting a liability account (in this case, Payroll Liabilities) increases its balance, showing that there is an amount owed. For each payroll, your business will primarily owe two things: Taxes to the government and pay to your employees.

The settlement transaction that Wave creates to your "Wave Payroll Clearing" (which will match the direct deposit withdrawal from your bank statement) is categorized to Payroll Liabilities. This debits the Payroll Liabilities balance, decreasing the amount owed, and showing that you have paid off the amount your business owes to your employees. If your bank account is connected to Wave, or if you upload statements electronically, then when the withdrawal transaction from your bank account is imported, it will automatically be categorized as a "Transfer to Wave Payroll Clearing" to show that the funds have cleared. 

What about contractor payments?

If you’re paying contractors through direct deposit, Wave will create individual bill payments for each contractor bill that's on the approved payroll, originating from the "Wave Payroll Clearing". These auto-generated bill payments will mark the contractor bills as Paid, so you don't have to worry about it. If your bank account is connected to Wave, or if you upload statements electronically, then when the withdrawal transaction from your bank account imports, it will automatically be categorized as a "Transfer to Wave Payroll Clearing" to show that the funds have cleared. 

What do I need to do?

If you’ve got your bank account connected or you’re uploading transactions to Wave, the system will take care of everything automatically. Wave will create the settlement transaction to the "Wave Payroll Clearing" when you run your direct deposit payroll, and when the withdrawal from your bank account is imported (or recorded by uploading a statement), it will automatically be categorized as a "Transfer to Wave Payroll Clearing" to show that the funds have cleared. 

Want to make sure everything’s recorded correctly? Keeping the above in mind and performing consistent reconciliation will ensure that everything is in its right place.

Any payroll tax payments to the government should be categorized to Payroll Liabilities as well. This will debit the liability for any taxes owed that is recorded in the initial payroll journal transaction.

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