The first thing to know about how to record your outsourced payroll is that you should be outsourcing your business's payroll. Trying to do your own payroll opens you up to a lot of exposure to errors and problems like miscalculating taxes, which can lead to even bigger problems like penalties and interest.
It is important that you record your payroll correctly or you could be over or understating your expense or net income. We find that many clients will just record the net amount that comes out of their checking account. They will debit payroll expense and credit cash. This is not the proper way to do this, and can lead to dangerous irregularities. There are several buckets that payroll falls into:
Salaries: This will be recorded as an expense (or debit). This is your gross wages.
Payroll Tax Expense: This should be recorded as an expense (or debit). This represents the employer's piece of FICA, SUI & FUTA.
Payroll Liabilities: This is basically anything that you deduct from your employees' paychecks. It includes things like 401Ks, health insurance, payroll taxes, and garnishments. These deductions would all be recorded as a credit on your journal entry. When these deductions get paid out, you will relieve the liability.
Payroll Processing Fee: This is the fee that the payroll company charges you for their service. This would be recorded as an expense (or debit).
Direct Deposit/Live Checks: This represents the net amount of the employees' checks. This would be recorded as a credit to your checking account.
It is important to understand the difference between an expense and a liability so that you can record your entries correctly. Once you have your entry fgured out, I would recommend setting up a memorized transaction so that all you have to do is just change the figures but not the accounts. This way there's less change being made, and therefore a smaller chance for error.
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