This is one of my favorite dead giveaways that a company has been working with a subpar bookkeeper, and it’s so easy to spot.
On the P&L, Payroll is shown as “Payroll/Wage Expense” and “Payroll Taxes.” If the ratio of these two number is 9:1, it’s been booked correctly. If the ratio is 6:4, it been booked incorrectly. The reason that this happens is because payroll processors debit the bank account for two amounts, wages and taxes, and they do so in the 6:4 ratio. However, the taxes amount is for both the employer and employees, and the company should report the Gross Wages of the employee and the Company Taxes, as opposed to the Net Wages and sum of Employer and Employee Taxes.
This requires a “Journal Entry” as shown below.
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