Cloud Payroll: Tax Reconciliations
For Cloud Payroll users, tax reconciliations will be performed as needed, generally following a quarter or year end. Tax reconciliations are used to account for rate changes or other adjustments that resulted in discrepancies between the payroll taxes filed and the payroll taxes owed.
Scenarios: There are four scenarios in tax reconciliations, which may happen independently or in combination. A payroll type of 'tax reconciliation' will distinguish these instances from other payrolls.
- Employer overpayments: the Cloud Payroll user receives a refund and the funds are posted as an increase in the bank account and decrease to the previously recorded expense.
- The amount of tax overpaid can be viewed on the 'what gets taxed' tab in the employer column and will contain negative amounts. The 'what gets debited' tab will be empty.
- Select 'create JE' to post the overpayment.
- Employee overpayments: the Cloud Payroll user receives a refund and is obligated to pass the erroneous withholding back to the employees. When the overpayment is received, the bank account increases and a payable is incurred as owed to the employees. When the funds are remitted to employees, the payable and bank account decrease.
- The amount of tax overpaid can be viewed on the 'what gets taxed tab' in the employee column and will contain negative amounts. The 'what gets debited' tab will be empty.
- To remit funds to employees:
- Select 'Create JE' to post the overpayment.
- Select 'Refund to Employees' to create an off-cycle payroll. Process the payroll as normal.
- Employer underpayments: the Cloud Payroll user will incur an additional withdrawal of the underheld taxes. The bank account is decreased and tax expense is increased.
- The amount of tax withdrawn can be viewed on the 'what gets taxed' tab in the employer column and will contain positive amounts.
- Select 'create JE' to post the underpayment.
- Employee underpayments: the Cloud Payroll user will incur an additional withdrawal of the underheld taxes. The bank account is decreased and tax expense is increased.
- The amount of tax withdrawn can be viewed on the 'what gets taxed' tab in the employee column and will contain positive amounts.
- Select 'create JE' to post the underpayment.
- Many employers opt to absorb the cost of the additional taxes themselves rather than receiving reimbursement from the employees. If a recoupment is desired, it can be accomplished through a post-tax deduction on the employee's next paycheck, once discussed with the employee.
Configuration: In Cloud Payroll, open Settings. There is a section in settings for Tax Overpayment Reconciliation.
- AP for Employees: This field is the accounts payable account used to hold amounts that should be refunded to employees.
- Company: This is a required field when using accounts payable. It is recommended to create a company titled "Employee tax overpayments" or a similarly identifiable name.
Other scenarios: the tax reconciliation functionality may not cover all scenarios. In instances where a journal entry created by the software is unbalanced, please use the JE matching mechanism for corrections.
Further information on tax reconciliations is available from Gusto: https://support.gusto.com/article/106622331100000/Tax-reconciliation-payrolls-and-debits
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