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 record the successful payment, which can be merged with the direct deposit withdrawal from your bank account so that the bookkeeping for your payroll is completely accurate.
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 (which will match the direct deposit withdrawal from your bank statement) is categorized to Payroll Liabilities. This debits Payroll Liabilities’s balance, decreasing the amount owed, and showing that you have paid off the amount your business owes to your employees.
What about contractor payments?
If you’re paying contractors through direct deposit, the settlement transaction that Wave creates will mark any contractor bills as paid automatically. If you’re paying independent contractors and employees on the same payroll, the settlement transaction will be split between the employee amount (categorized to Payroll Liabilities), and the contractor amount(s) (categorized as bill payments for each bill that was paid with Direct Deposit).
Settlement transactions will only be created if your funding account is set up under Settings > Account Mapping. Once you’ve selected the funding account that your Direct Deposits are pulled from there, each payroll you approve will be accompanied by a settlement transaction.
What do I need to do?
If you’ve got your bank account connected, or you’re uploading transactions to Wave, the successful withdrawal of your payroll direct deposit will be recorded as an Uncategorized Expense. Merge this transaction with the settlement transaction in Wave. The resulting transaction will be categorized correctly, and your payroll bookkeeping will be completely accurate.
By the end of the merge you should be left with two transactions for each payroll:
- The journal transaction recording all of the expenses and liabilities associated with your payroll.
- The settlement transaction recording the successful payment of employee and contractor funds.
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.