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.

Approved payroll journal transactions

Wave payroll clearing

Paying employees

Paying contractors

Paying government agencies

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 included on your Profit & Loss report as a separate line item.
  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 your employees' 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.

Payroll journal entries cannot be deleted or edited, except for the description, any "Uncategorized"  line items, Notes, and Verified/Not Verified. This is in order to keep your payroll accounting correct. You can, however, create a new journal transaction if there are specific adjustments you would like to make, such as separating payroll liabilities into different accounts.

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.

Wave payroll clearing

If you have signed up for direct deposit, Wave will take care of your payroll bookkeeping automatically. Every time you pay your employees or remit your payroll taxes through Wave, a settlement transaction originating from a holding account called "Wave Payroll Clearing" will automatically be created.

The first time you process a direct deposit payroll, the "Wave Payroll Clearing" account will be added to your Chart of Accounts as a Money In Transit account.

What is a holding account, and why is it there? When you pay your employees or remit your taxes through Wave, the withdrawal transaction from your bank account won't import into Wave in real time. At the same time, we know in the real world the funds have been withdrawn, and your Payroll Liabilities should be reduced (remember, when you approve a payroll, the amounts that you need to pay are recognized in a journal transaction as Payroll Liabilities, and when you pay them, those Payroll Liabilities should be reduced). 

To account for this, Wave automatically creates a settlement transaction to the "Wave Payroll Clearing" account, equal to the amount of funds that were withdrawn from your bank, and categorizes it to "Payroll Liabilities". 

Ok, great, the Payroll Liabilities are cleared out, but what about when the withdrawal transaction from my bank account actually imports into Wave? When the withdrawal from your bank account arrives, it is automatically categorized as a "Transfer to Wave Payroll Clearing." This will make the balance in the Wave Payroll Clearing account zero, and you can reconcile your bank account with the bank imported transaction.

  1. This is a contractor bill payment "paid" out of the Wave Payroll Clearing account.
  2. This is the payroll settlement transaction for employee pay, also "paid" out of the Wave Payroll Clearing account.
  3. This is the automatically generated transfer between the bank account (where the funds were actually paid out of) and the Wave Payroll Clearing account. This also will bring the balance of the Wave Payroll Clearing account to zero.
  4. This is the withdrawal transaction from your bank account, which is recorded as a transfer to the Wave Payroll Clearing account.

In this way, all of your payroll bookkeeping is captured accurately and automatically! 

The Wave Payroll Clearing account balance should be zero after the transfer generated by the withdrawal transaction in your bank account.

Even if you have not signed up for direct deposit or our Automated Payroll Tax Payment and Filing, the bookkeeping is straightforward. Check out the below sections for more details.

Paying employees

If you have signed up for direct deposit, then whenever you run a payroll, Wave will automatically create a settlement transaction from your "Wave Payroll Clearing", categorized to “Payroll Liabilities,” that represents the amount Wave has withdrawn from your bank account (you are now paying the money that you owe to your employees, so the Payroll Liabilities should be reduced). When the withdrawal from your bank account imports into Wave, it will automatically be categorized as a “Transfer to Wave Payroll Clearing” to restore the balance that had been withdrawn from this holding account.

The settlement transactions generated by Wave Payroll cannot be edited or deleted.

If you write manual checks, you can either record 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. There will be a separate transaction for each bill payment, and each of these will be recorded from the “Wave Payroll Clearing”. In the real world, those funds were withdrawn from your bank account, and when the withdrawal from your bank account imports into Wave, it will automatically be categorized as a “Transfer to Wave Payroll Clearing” to restore the balance that had been withdrawn from the "Wave Payroll Clearing”.

The bill payment transactions generated for contractor payments made via payroll cannot be edited or deleted.

Paying government agencies

If you’re signed up for Automated Payroll Tax Payment & Filing, and your tax payments are being processed through Wave, a settlement transaction will be created on the day that the money is withdrawn from your bank account, recorded to the “Wave Payroll Clearing”. 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 are reducing the balance of your liability. These funds were withdrawn from your bank account in the real world, and when the withdrawal transaction from your bank account imports into Wave, it will be automatically categorized as a “Transfer to Wave Payroll Clearing” to restore the balance that had been withdrawn from the “Wave Payroll Clearing.” 

If you are not remitting your payroll tax payments through Wave, then when you make the payment on your own, just be sure to categorize the withdrawal or cleared check to “Payroll Liabilities” when the withdrawal is recorded in Wave.

Was this article helpful?
8 out of 9 found this helpful