When you use Wave’s payroll feature, Wave automates the payroll bookkeeping process, so you need to do less manual accounting. This helps keep your accounting records accurate whenever you process payroll. Understanding how payroll journal entries, clearing accounts, and contractor payments fit together helps you maintain your payroll records.
When you approve payroll
Every time you approve a payroll run, Wave automatically creates a journal transaction. This entry records the total costs of the payroll.
For a detailed breakdown of the payroll bookkeeping process, see View and understand approved payroll bookkeeping.
Payroll Liabilities and Clearing account
The Payroll Liabilities account tracks the total amounts owed to employees and tax authorities. Meanwhile, the Wave Payroll Clearing account acts as a temporary money-in-transit account to manage funds while direct deposits and tax withholdings are processed.
Once the payroll is processed, Wave creates a settlement transaction that debits Payroll Liabilities and credits the Clearing account. This shows that the transfer of the owed funds to employees and tax authorities has started. If you're importing transactions automatically, once the bank withdrawal imports into Wave, it is categorized as a transfer to clear the holding account balance.
Paying independent contractors
For independent contractors, payments are bookkept depending on the payment method:
- Direct deposit: Bookkeeping is automatic. Wave generates individual bill payments from the clearing account to mark contractor bills as paid, and incoming bank withdrawals automatically balance the clearing account. Learn more about automatic bookkeeping when paying independent contractors via direct deposit
- Manual payments outside of Wave: These payments require manual tracking. You must manually mark bills as paid or link bank-imported expense transactions to outstanding contractor bills. Learn how to bookkeep contractor payments made outside of Wave