Wave Payroll: all about the bookkeeping

You're ready to approve a payroll in Wave - what's next? This guide will walk you through the steps to take before and after approving a payroll, as well as explain how Wave automatically handles your payroll journal transactions.

Account Mapping

Approved payroll journal transactions

Paying employees

Paying contractors

Paying government agencies

Bank reconciliation FAQ

Account Mapping 

Ensuring that your accounts are mapped correctly will mean your payroll journal transactions will appropriately reflect the accounts that have been debited and credited when you approve a payroll.

To map your accounts in Wave:

  1. Click Settings in the left hand menu and to
  2. Click Account Mapping

From here, you can select which account you would like your bank transactions to post from.

Please note that if you update your funding account at any point, you will have to go here to update your account mapping as well, as this is not done automatically.
If your new account isn't present, you can connect it by going to the Banking menu on the left-hand side and down to Bank Connections. Otherwise, you could create a new account manually by going to Accounting > Chart of Accounts.

Approved payroll journal transactions

Every time you approve a payroll, Wave automatically creates a journal transaction to record the amount of payroll expenses, and the amount of money you owe, including to your employees and to the tax authorities. This is what a typical payroll journal transaction looks like:

Let’s break down what all the line items represent.

  1. The description and date of the journal entry are the last date of the payroll period.
  2. This line item represents the gross payroll expense, which is the total pay earned by your employees; this is recorded to the expense category shown in your Account Mapping, and is included on your Profit & Loss report.
  3. This line item is the amount of payroll taxes which you owe as the employer; this is recorded to the expense category selected in your Account Mapping, and is included on your Profit & Loss report.
  4. This is the amount due to your employees - the total of the net paychecks (employee wages after taxes).
  5. This is the amount of employee payroll taxes which you’ve withheld from their paychecks and need to send to the government.
  6. This is the amount of employer payroll taxes which you owe to the government for this payroll period, which in this example is the same amount as line 3.

Lines 4, 5, and 6 are all booked to an account called “Payroll Liabilities.” This is the account where all the amounts that you owe for payroll are recorded until they’re paid. 

If you delete an approved payroll, a matching journal transaction will be created with the credits and debits reversed, to cancel out the original transaction. The journal transaction will also be tagged as “deleted” for ease of reference.

To view your "Payroll Liabilities" balance, go to your Reports on the left-hand side menu, then Balance Sheet. You will then be able to see the balance in the “Payroll Liabilities” account under Liabilities > Current Liabilities. This is how much you owe to your employee(s) and/or the government on that day. As you pay your employee(s) and send payroll taxes to the government, the amount you owe (the balance in the account) will go down.

Tell me more about Payroll Liabilities

Think of the Payroll Liabilities account as a clearing account; when you approve a payroll, all the amounts you need to pay are recorded as a credit (increasing the total), and as you pay these amounts, you record the money out as a debit (decreasing the total).

For example, let’s say you approve a payroll for $1,000 of wages, $200 of employee payroll withholding taxes, and $200 of employer payroll taxes. On the payroll period end date, Wave will book $1,200 as a credit to Payroll Liabilities.

This represents:

  • the net amount due to your employee;
  • the amount of taxes withheld from their wages; and
  • the amount of payroll taxes you owe as the employer.

When your employee is paid (whether by direct deposit or cashing a check), it’s categorized as a debit to Payroll Liabilities. This reduces the total to $400, which represents the payroll taxes you still need to pay to the government ($200 withheld + $200 employer expense).
When you pay your payroll taxes, that $400 withdrawal (or if you send multiple payments, the total of those payments) will also be categorized as a debit to Payroll Liabilities. The balance will now be $0 because you’ve paid all the amounts you owe for that payroll period.
Of course, it’s not usually this simple; if you pay payroll taxes on a monthly or quarterly schedule, the balance has a chance to build up as those amounts accumulate from multiple payrolls. However, at any given time, you should be able to look up the total balance in your Payroll Liabilities account and determine what makes up that total.

Paying employees

If you have signed up for direct deposit, Wave creates a settlement transaction on the day that the money is withdrawn from your bank account. This will appear on your Transactions page as an expense transaction, and it will include “From Wave Payroll: EFT” above the description. It will be categorized to the “Payroll Liabilities” account, because you are now paying the money that you owe, and so reducing the balance of your liability. You can merge your bank-imported expense transaction with the system-made settlement transaction.

If you write manual checks, you can either enter those checks manually as expense transactions, or wait for them to import from your bank connection. Then, categorize them to “Payroll Liabilities” in order to reduce the liability.

Paying contractors

If you have signed up for direct deposit and are paying contractor bills, Wave creates a Bill Payment when the contractor is paid through Wave Payroll. This will appear on your Transactions Page as an expense transaction, and each bill will have a separate line for each bill payment.

When it comes time to reconcile your bank account, you won’t be able to merge multiple bill payments or bill payments and paycheck withdrawals. Instead, you’ll need to delete the bank import with the total amount Wave withdrew from your account, and match each of the individual bill payment and/or paycheck withdrawal transactions in the reconciliation. The total will equal the amount withdrawn, but it won’t be one big number to match your bank statement.

Paying government agencies

If you’re signed up for Automated Payroll Tax Payment & Filing, Wave will withdraw the money you owe for payroll taxes and submit it to the government for you. Wave creates a settlement transaction on the day that the money is withdrawn from your bank account. This will appear on your Transactions page as an expense transaction, and it will include “From Wave Payroll: EFT” above the description. It will be categorized to the “Payroll Liabilities” account, because you are now paying the money that you owe, and so reducing the balance of your liability. You can merge this settlement transaction with the bank imported transaction.

If you’re not signed up for Automated Payroll Tax Payment & Filing, when you make the payment, just be sure to categorize the withdrawal or cleared check to “Payroll Liabilities.”

Bank reconciliation FAQ

What am I supposed to do with a settlement transaction from Wave that matches one imported from my bank account?

A: What you need to do for this is merge the duplicates: To merge, click the check boxes to the left of a set of duplicates. Then, at the top of the transaction table, click 'Merge'.
You can also choose to delete the bank imported transaction, and then ensure that the Wave Payroll settlement transaction is associated with the correct bank account.

How do I make sure my settlement transactions are associated with the correct bank account?

A: Navigate to the Settings and to the Payroll section, and select Account Mapping. Then, open the Funding Account dropdown menu, and select the bank account you use for payroll expenses.

What am I supposed to do when I’ve paid contractor bills through Wave’s direct deposit? Now my bank import makes it look like I’ve paid them twice!

A: If you have multiple contractor bill payments made through Wave Payroll, or a mix of employee wages and contractor bill payments, you won’t be able to merge the transactions created by Wave with the bank import. Instead, delete the bank import, and reconcile your bank account with the Wave-generated transactions.

It’s very important that you do not delete the Bill Payments created by Wave.

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