Payroll Journals Explained and the Ultimate ERC Accounting Treatment Method for 2023

To be able to apply for the Employee Retention Credit, businesses must first figure out if they are eligible for the program and determine the amount of credit they can receive. The payroll journal can be extremely helpful with this process, mainly because it provides the necessary data to perform these calculations accurately.

How are payroll journals used for ERC accounting treatment for the Employee Retention Credit? If you are wondering “what is a payroll journal,” the following discussion can help you make sense of these entries if you are applying for the first time and how they apply to the ERC.

Employee Retention Credit ERC and Payroll Journal

Employee Retention Credit is a term used to describe benefits provided by the government. These were assigned to companies that experienced a full or partial closure during the pandemic. If a company retained most of its employees during the pandemic, it could apply for the ERC.

However, it can be hard to account for this credit. The ERC accounting treatment might be complicated for a small business entity. Often, hiring a specialist becomes necessary as you dive into the unexplored world of ERC benefits. 

If you are a growing business that began operations during the pandemic, you may not know everything about payroll journals. Even the most experienced professionals find it hard to determine accurate accounting treatments for the ERC. 

Thus, depending on a trusted source is the key to success. It is best to find a tax professional who knows everything about these entries and trusts them to guide you through the process. 

Before diving into the ERC accounting treatment, let’s understand the answer to “What is a payroll journal?”

Payroll Journal Explained

A payroll journal can be explained as detailed entries that encapsulate the company’s wages as provided to employees over time. Any transaction related to wages entered into the company’s records is supposed to be recorded in the journal for the payroll tax liability.

Remember that recording wages in your general ledger might be enough as you start out. However, a payroll journal is necessary for a growing organization or larger business entities. This is due to the volume of entries that might complicate other accounting models and enable proper accounting treatment with reasonable assurance. 

Business entities often record specific entries in their payroll taxes and consolidate the totals to be entered in the company’s general ledger. Accurate payroll tax credits journal entries are essential as that is what you will use to apply for the ERC benefits. 

Uses of Financial Statements and the Payroll Journal

1. Determining Eligibility for ERC: To be eligible for the ERC, businesses must meet specific criteria related to their operations during the pandemic. They must have experienced either a full or partial suspension of operations or a significant decline in gross receipts. The payroll journal can help determine if these criteria are met by providing a clear record of financial transactions during the relevant periods.
2. Calculating Qualified Wages: Qualified wages are the basis for determining the amount of ERC a business can claim. They include regular employee compensation, certain healthcare costs, and allocable qualified health plan expenses. The payroll journal contains detailed employee wages and benefits records, making it an invaluable resource for calculating qualified wages.
3. Determining the Credit Rate: The ERC rate depends on the calendar quarter the wages were paid. It is essential to consult the payroll journal to determine the appropriate credit rate for each quarter, as this directly impacts the total amount of ERC that can be claimed.
4. Applying the Credit Cap: The ERC has a maximum cap per employee. To ensure compliance with this cap, businesses must accurately track employee wages and benefits in their payroll journal. This information is needed to calculate the total credit that can be claimed for each employee.

The ERC Generally Accepted Accounting Principles

The ERC benefits will be entered as accounts receivable on the debit side and income from contributions or government grants on the credit side. The entries may differ depending on how you receive those ERC benefits over time. 

For example, the tax credit side may record it as a refundable prepayment for organizations receiving payments in advance. Let’s go through some of the different ways of recording the Employee Retention Credit ERC;

1. Accounting Principles

The Employee Retention Credit benefits most eligible employers receive under the CARES Act, applied to years 2020 and 2021, can be entered as a refundable credit. These are recorded under Social Security taxes for the employer. They are then refunded based on qualified wages for employees. Thus, the ERC accounting model can be complicated. 

It can be straightforward when you attempt to record the ERC through an appropriate accounting standard. The update “Subtopic 958-605, Contributions Received and Contributions Made” is usually applied to recording the ERC. Since ERC eligibility depends on a few factors, this conditional grant may or may not apply. 

2. Eligibility and Qualification

The accounting method may also depend on how and when you qualify for the ERC. Whether you qualify based on a partial or complete closure of services, you can record the ERC as a receivable as you can expect to receive those benefits. 

Remember that if you want to record the entries in your accounting journals, you must confirm whether you qualify for the benefits. Incorrect assumptions can lead to a need for error corrections down the line. 

Recording the ERC Tax Credit

If you are wondering where the ERC is usually recorded, you can add it to the following financial statements;

• Statement of Activities: This statement can include the Employee Retention Credit ERC as gross, labeled as a contribution or grant (other income-related labels can also be generated). 
• Financial Statements Position: If you want to record the entry in the Financial Statement Position, note that the benefit is recorded as a receivable. However, the amount entered is the one that is not taken as a credit. 

Documenting Employee Retention Credit in the Payroll Journal

Once the ERC has been calculated, it is essential to document this information in the payroll journal. This ensures accurate financial reporting and compliance with tax regulations. Here’s how to do this effectively:

1. Create a Separate ERC Account: Establish a dedicated account in the payroll journal to record Employee Retention Credit transactions. This account should be used exclusively for ERC-related entries, which helps maintain accurate records and simplifies future audits.
2. Record the Credit: Document the total amount of ERC claimed in the appropriate account. Ensure that this entry aligns with the payroll period in which the credit is applicable, as this is critical for accurate financial reporting.
3. Track ERC-related Adjustments: Any adjustments to the ERC amount, such as refunds or additional credits, should be recorded in the payroll journal. This ensures that the financial records are up-to-date and allows for easy reconciliation with the IRS if needed.

The Employee Retention Credit Accounting Model

Confusions regarding the proper accounting for the employee and entries are common. You might not know much about recording for the ERC benefits as a small business. The ERC accounting policy is hard to deal with, even for professionals.

Luckily, we offer a solution to help you receive the benefits and finish the ERC accounting quickly. Fill out this form and start applying for the ERC benefits today. Don’t worry. Our ERC specialists are there for you every step of the way. From figuring out eligibility to maintaining proper accounting records, we have got you covered.

Payroll Journal Final Words

In conclusion, a payroll journal is essential for calculating and documenting Employee Retention Credit. By maintaining accurate records and following the steps outlined in this guide, businesses can efficiently claim the ERC and provide much-needed financial support to their workforce during challenging economic times.

Why You Need an ERC Specialist

An ERC tax advisor can help eligible businesses record ERC entries more efficiently. It takes much less time, and you can shift that burden to focus on other, more important business decisions. This also ensures the paperwork is done properly and meets all the Internal Revenue Service criteria. The piece of mind is well worth the investment.

If you would like more help with Employee Retention Credit, or complete a complementary pre-qualification form, reach out to us, and we would be glad to help.