What is a settlement transaction?

SystemSystem Posts: 412 admin

imageWhat is a settlement transaction?

When you approve a payroll, Wave creates a journal transaction on your Transactions page that records all of the expenses and liabilities related to that payroll. Once you’ve paid your employees, W...

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edited January 22, 2020 in Help Center Discussion

Comments

  • cwsinkcwsink Member Posts: 10

    Each payroll credits the Payroll Liabilities account for 3 amounts: 1) Net pay 2) Employee taxes 3) Employer taxes.
    My payroll liabilities account is growing as my settlement transaction only debits the Net Pay amount, not the tax amounts.

    When and how do I settle that liability?

  • BarsinBarsin Member, Moderator Posts: 2,041 ✭✭✭

    Hey there @cwsink

    Essentially the initial journaled transaction is categorized under a liability account. So, when a payroll is approved, the liability account is credited (increased) by, the amount that you owe the employees. This is the accounting equivalent of saying “I approved payroll, so now I owe my employees the wages from that payroll”.

    Wave will also create a withdrawal transaction in the Transactions page whose account is set to the funding account from Account Mapping, and whose category is set to Payroll Liabilities. The date of this transaction will match the withdrawal date for the Direct Deposit. Where the journal transaction credited Payroll Liabilities, this transaction debits it by the amount of the withdrawal. This is the accounting equivalent of saying “Ok, now I’ve actually paid my employees.” You should categorizing these and your payroll tax payments as liabilities

    The triplicate transaction is if you have a bank account connected, it will pull in the same withdrawal transaction, so you would have to either merge the two transactions, or delete the bank-imported transaction, as Wave will have already accounted for it. People recommend merging by selecting the check boxes beside the two withdrawal transactions and selecting merge at the top instead of deleting, but it doesn't exactly matter to be honest. Some people don't like the idea of deleting a transaction.

    I'd highly recommend reading about how our payroll services work with this handy article.

    https://support.waveapps.com/hc/en-us/articles/360046489492-Wave-Payroll-all-about-the-bookkeeping

  • cwsinkcwsink Member Posts: 10

    Thanks for that response @BarsinA !
    So to be 100% clear, I've been recording tax payments as Tax Expense (category) They should be a debit to the Payroll Liabilities, instead. Correct?

    Update
    To help clarify, your response addressed the liabilities owed to the employees. The tax liabilities to the government would also be a debit to Payroll Liabilities when that payment/withdraw from my account occurs?

    edited August 26, 2020
  • CalliePCallieP Member Posts: 439 admin

    Hi there @cwsink , thanks for your message! You got it - the taxes would also be categorized to Payroll Liabilities in the journal. When you pay the taxes in your remittances, the expense/settlement will be to the same Payroll Liabilities category to indicate that the liability is not owed anymore!

  • GregVGregV Member Posts: 1

    Hello,

    Wave has been generating a "Wave Clearing Account" entry and a "Transfer to Wave Clearing Account" entry for each of my payroll periods for the year UNTIL the last 4 periods. The direct deposit is completed through my bank, but the "Wave Clearing Account" is not being rectified in the Wave software. Is there some way to rectify this?
    Thank you

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