Why your payroll expense in QuickBooks is higher than the checks you wrote

A general contractor we work with has three office employees. Payroll runs twice a month. One afternoon he called to ask why QuickBooks showed $15,795 in payroll expense for the month when he had only cut three checks totaling $9,205.

The software was not wrong. The books were correct. The gap between $9,205 and $15,795 is a complete picture of what three employees actually cost.

What the net paycheck actually is

A paycheck is not a payment for the full amount the employer owes the employee. It is the gross wage minus taxes and deductions withheld on the employee’s behalf.

The employer collects those withholdings, holds them briefly, then sends them to the IRS and state revenue agency on a scheduled deposit cycle. The Profit and Loss report (P&L) records the gross wage because that is the employer’s total obligation. The check that clears the bank is the amount remaining after those taxes were removed.

Four items that explain the gap

Gross wages are larger than take-home pay. An employee earning $5,000 per month does not receive $5,000. Federal income tax, employee Social Security (6.2 percent of gross wages), employee Medicare (1.45 percent), and state income tax are all withheld before the check is issued. The P&L records the $5,000 gross wage. The employee’s check might be $3,750 or less depending on their filing status.

The employer pays a matching FICA contribution. Social Security and Medicare taxes are split evenly between employee and employer. The employee’s 7.65 percent combined FICA share is matched dollar for dollar by the employer. On a $5,000 gross wage, the employer sends $382.50 to the IRS on top of what the employee contributed. That employer match is a payroll tax expense. It does not appear on the employee’s pay stub. It appears on the P&L.

Benefits premiums add to the employer cost. When the employer contributes toward health insurance, dental, or a retirement match, those payments go directly to a carrier or plan administrator on their own schedule. They are not part of the paycheck. A typical employer health contribution runs $400 to $800 per employee per month. That cash leaves the bank separately, and the P&L records it as payroll-related expense in the same period.

Tax deposits clear the bank on a different day. Net paychecks and payroll tax deposits rarely settle on the same date. Most payroll processors issue net checks on payday and pull the tax deposit liability one to three business days later. A business owner who reviews the bank feed on payday sees only the net checks. The tax deposits appear later in the month under an automated clearing house description that may not be recognizable as payroll without closer review.

What the numbers actually show

Here is one month of payroll for three employees.

The $9,205 in net checks is real. The $15,795 P&L expense is also real. They measure different things. The net checks cleared first on payday, then $3,795 in payroll tax deposits two days later, then $1,800 in health insurance premiums the following week. Every dollar is accounted for.

Why this matters

When an owner looks at net checks and calls that their payroll cost, three problems follow.

Pricing absorbs the wrong labor number. If this contractor believes his three office employees cost $9,205 per month instead of $15,795, every project estimate that includes overhead recovers too little. The shortfall is $6,590 per month, or $79,080 per year of unrecovered overhead.

Cash planning uses the wrong baseline. A 90-day cash forecast built on net check totals will understate monthly payroll-related outflows. Shortfalls appear to arrive without warning when the full picture was available all along.

Hiring decisions use an incomplete cost figure. When an owner considers adding a position, the number that matters is total employer cost, not the salary offered at hire. A $65,000 annual salary becomes roughly $78,000 to $83,000 after FICA, health insurance, and a retirement match. The difference matters before the offer is signed.

What properly recorded payroll looks like

For clients running payroll through a processor, we connect the payroll summary report to three categories in QuickBooks: gross wages, payroll tax expense (the employer’s FICA match), and benefits expense (employer health and retirement contributions). Employee withholdings are recorded to payroll liability accounts. When the tax deposit clears, those liabilities clear with it. The P&L shows what employees actually cost, not just what they deposited.

Best practices

A few habits that keep payroll expense accurate and readable over time:

• Use the payroll processor’s payroll summary report, not the bank feed, as the source document for monthly payroll entries. The summary shows gross wages, all withholdings by category, employer taxes, and net pay in one place.
• Match payroll tax deposits to the payroll run they belong to. A tax deposit that hits the bank on Tuesday should be tied to the Friday payroll that generated it, not categorized as a generic expense.
• Record employer benefits premiums in the period they cover. A premium paid in October for October coverage is an October expense.
• Review payroll expense as a percentage of gross revenue each month. For most service businesses that ratio falls between 40 and 60 percent. An unexplained drop usually means something was miscategorized.

Three questions worth asking

If you are not certain how payroll is being recorded today, three questions to ask whoever handles your books:

1. Does our payroll expense on the P&L reflect gross wages plus employer FICA plus employer benefits, or does it reflect only the net checks we issued to employees?
2. When payroll tax deposits clear the bank, how are they categorized, and do they offset a payroll liability account or hit a general expense account?
3. What was our total employer cost per employee last month, and how does it compare to each employee’s gross salary?

If those answers are uncertain, your books may be understating your actual labor cost.

Send us your last payroll summary alongside the payroll expense line in QuickBooks for that same month. We will confirm whether they tie out, and identify what is missing if they do not.