Why Your Payroll Program and Your Accounting Program Should Talk to Each Other

Paying employees and payroll taxes accurately and on time are two of your most important tasks as a business owner. Tracking what you've paid and when is also important. That's why payroll and accounting integration can be critical in managing your business.

What Payroll Software Does

In the past, payroll was done by hand, including calculating pay and writing checks. Fortunately payroll software has automated this cumbersome and error-prone process. After setting up an employee and their pay rate and tax status, cutting a check can be a simple matter of entering the pay period and hours. Year to date earnings and taxes are totaled. If you need to, you can track vacation and sick time use as well as deduct employee contributions for insurance. Best of all, the deposit amount is figured out and quarterly tax forms are printed for you.

What Accounting Software Does

Computerized accounting systems have made bookkeeping a lot simpler and more accurate. Tracking sales and expenses is a matter of recording entries into the system, and the software allows you to make vendor payments and reconcile your bank accounts much faster.

Most accounting software also allows you to report payroll and tax information on your financial statements and business tax returns. Wages and your share of payroll taxes are shown as expenses on your profit and loss statement. Employee taxes accrued but not deposited are shown as a liability on your balance sheet, one that is adjusted when you make the deposit. In a similar way, paid time off is also accrued and shown on the balance sheet. In certain jurisdictions, employees may have a right to receive their paid time off when they leave the company.

Why Payroll and Accounting Integration is Important

The payroll system can show the employee records and totals of wages paid and taxes that you've taken out and matched. You may also be able to print reports and W-2 statements at the end of the year. But in order for this information to be included in your financial statements, the payroll and accounting system should ideally be integrated. Lack of integration can mean a major hole on your financial statements and as a result, your tax returns. Without automatic updates, paychecks will need to be entered manually into the accounting system, which can result in errors and duplication of efforts. You may also need to make journal entries to fix mistakes.

A key feature to look for in any payroll system is the ability to export all payroll transactions into your accounting system. This will help to ensure that your books and your payroll ledgers match up. This can be a critical part of having accurate tax forms, both for payroll and business taxes.

It's also important to calculate employee costs as a percentage of sales, which is a simple matter if systems are integrated. Many industries aim for a desirable ratio of labor to sales, and if you're spending too much on employees your profitability is impacted. This is especially important if you pay a lot of overtime because those wages may be paid at time and a half. Such expenditures can creep up without you realizing their impact on the bottom line.

Some accounting programs come with payroll modules so they are fully integrated from the outset. However, many businesses use simpler and less expensive methods of preparing payroll. You can purchase and install software, or you can use an online service. Some benefits of an online service include keeping you up to date with tax tables, no required upgrades, and accessibility from virtually anywhere.