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Integrate a Payroll system


Overview

Payroll integration with Xero can be handled either by Manual Journals or by Accounts Payable invoices (bills).

ACCPAY Invoices (bills) Manual Journals
Associated to a specific Contact (each employee) in Xero Better for aggregated, generic payrun data
Track wages, insurance, contributions, deductions Don’t allow for the granularity that Invoices do
Each line/pay item attributed to an account Less code & logic, harder to modify or rollback

Example - Manual Journals

The following example will step through how payroll works with Manual Journals and explains in detail the resulting Profit and Loss and Balance Sheet figures.

Consider the following fictitious example of an NZ pay run.

We have Wages of $2500 and Tax of $259.07 The total expense to the business is $2759.07

The employer may need to make other contributions and deductions from their employees before paying their staff (net pay). These amounts can be reflected on the Manual Journal as required.

Manual Journals can’t use the Accounts Payable system account for Wages Payable so you need to use a different Current Liability account. You should offer the user the ability to select an existing account or create a new account for them via the Accounts endpoint. Payments to this account will need to be enabled.

Once this Manual Journal is posted we can see on our Profit and Loss the salaries expense and employer national insurance are correctly shown for the period.

Looking at the Balance sheet before the payments to the employees have been reconciled we see the outstanding employee net pay is shown in the accounts payable total.

Once the payments to the employees for their net pay have been made and each of the payments have been reconciled (creating spend money transactions into the Wages Payable account), Accounts Payable liability reduces by the full amount of the net pay, leaving just the NIC Payable and PAYE Payable.


Example - Accounts Payable Invoice

The following example will step through how this works with Account Payable Invoice and explains in detail the resulting Profit and Loss and Balance Sheet figures.

Consider a similar fictitious example of an NZ pay run.

We have Salaries of $3500 and Tax of $250 The total expense to the business is $3750

The employer may need to make other contributions and deductions from their employees before paying their staff (net pay). These amounts can be reflected on the Manual Journal as required.

Once this Accounts Payable invoice is approved we can see on our Profit and Loss the wage expense and employer national insurance are correctly shown for the period.

Looking at the Balance sheet before the payments to the employees have been reconciled we see the outstanding employee net pay is shown in the accounts payable total.

Once the payments to the employees for their net pay have been made and the Cheque Account has been reconciled the Accounts Payable liability reduces by the full amount of the net pay, leaving just the the NIC Payable and PAYE Payable.

In the case that there is an outstanding amount (e.g. an employee hasn't banked a wage cheque) on an accounts payable invoice at the end of a period you can pay the invoice off by using a clearing account. e.g. the Salaries Liability account

If the user already has a Salaries Liability account, you can use that. If not, you can create a new account for them via the Accounts endpoint. Payments to this account will need to be enabled.

Once this account is setup you can go to the invoice and make a payment from your chosen liability account / clearing / holding account.

The resulting balance sheet shows the liability now moved to the salaries liability account.

The example shown is of a generic nature and your payroll solution may identify different lines. The same theory is applied to any regions payroll integration requirements.


Frequent Questions

How is posting an accounts payable invoice different to posting a general journal?

An approved accounts payable invoice has a resulting journal so all we are doing here is interpreting and presenting the same data that you present on the general journal for import to the accounting system in an easier way for our customers using Xero.

The accounts payable invoice value is equal to the net pay, the accounts payable lines identify the various debits and credits - much the same as you would identify on the general journal. The Account/GL/Nominal codes that are used within the accounts payable invoice are specified in the payroll system much the same as creating a general journal.

How can I interpret the payable entry to be made from the journal created by the payroll system now?

It's quite simple - the journal debits are represented as positive line values and the credits presented as negative line values on the accounts payable invoice. The net pay is the value of the payable and is not explicitly presented as a line on the accounts payable invoice.