Did you loan your employee money? You can deduct the payments from their paycheck. But be careful to record it all properly.
Set up the employee loan first. The loan account will be a current asset. Let’s just call it employee loan. To record the initial payment of funds to the employee you would debit the loan account and credit the bank account that the money came out of. So, Let’s say you loaned the employee $3,000. It would look like this:
Dr Employee Loan $3,000
Cr Checking $3,000
To record a loan payment on the balance, you would credit the loan and debit the checking account the amount being paid. Let’s say they pay us $100 this pay period. Here’s what this looks like:
Dr Checking $100
Cr Loan $100
That makes sense, right? Pretty straightforward. Now we must add it to the paycheck. I’m not going to list all the taxes and deductions here; I’m just addressing the loan. So, here’s a simplified version of a paycheck without the deductions: (Wages can be wage expense or wages payable, however you’re set up.)
Dr Wages $1,000
Cr Checking acct $1,000
So, when we put those two entries together, we get this: (I’ve combined the Dr and Cr for the checking account into one entry.)
Dr Wages $1,000
Cr Loan $100
Cr Checking $900
Let’s look at this: The full amount of the employee’s wages are properly categorized as wages. This is extremely important; this is the earnings listed on the W2 and used for tax purposes in addition to being an expense. The loan is receiving the $100 payment, and the loan balance will be reduced by this amount. The checking account is reduced by the amount of the paycheck leaving the amount of the loan payment in the business account.
It’s more complicated than this, of course. Payroll is one of those bookkeeping tasks that’s multi-faceted. But this should help with employee loans.
Have fun! And be nice to your bookkeeper!
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