Payroll Liability vs Expense

There are some deductions from payroll checks that are difficult to schedule through QuickBooks Payroll Liabilities.

This most often happens with a deduction like health insurance. This can be setup just like any other deduction, including taxes. By default, QuickBooks wants to use the liability account Payroll Liabilities as you can see below.

Using this default liability account results in many, many transactions to this one account. Searching for the cause of, say, an incorrect balance becomes a daunting task.

Instead, when using this setup, create your own liability account named something like Health insurance Payable. Make sure the account type in Other Current Liability.

The difficulty a deduction like this presents is when it is time to pay. Payroll Items setup to use an Other Current Liability account will show in the payroll liabilities screens in QuickBooks, along with the account balance as the suggested amount to pay.

This screenshot is of the Create Custom Liability Payments window. If using Scheduled Liabilities, which is usually recommended, the problem we are about to describe still exists.

Let’s say, for example, Rock Castle Construction, our sample file, pays employees every two weeks. The bill from the insurance company for the health insurance, is due monthly.

The amounts never match. The due dates for a payroll deduction that is paid by the company owner monthly, but being deducted from employee paychecks bi-weekly, will never coincide.

So how to deal with that?

One is that once the liability check is created, the amount can be changed so it matches the amount being paid the vendor. Many QuickBooks users though find this awkward and wonder why they should use payroll liabilities for this particular deduction if they have to manually edit the check anyway.

The alternative is not to use an Other Current Liability account in the setup of the payroll item. Instead, allow the deductions from the paychecks directly credit, or lessen, the expense for health insurance.

The above graphic shows the payroll item being edited. The liability account is being replaced with the expense account normally used for paying the insurance vendor.

When using this setup, the Health insurance payroll item never shows in any of the Pay Liabilities screens. Instead the amounts are deducted from the cost of health insurance.

Following is a screenshot of a quick report of the Health insurance expense account. Note how the paycheck deductions reduce the expense.

Hector Garcia, CPA
Certified Advanced QuickBooks ProAdvisor
12401 Orange Drive #136
Davie, FL 33330
954-414-1524
hector@garciacpa.com

Hector Garcia

Hector Garcia

Hector Garcia is a CPA and QuickBooks Consultant.
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