The beauty of a payroll advance

I love my work. Best of all is when a situation that’s potentially confusing in “real life” gets boiled down into a single elegant journal entry in QuickBooks.

Say you’re working with a very small organization (our favorite kind!) with only two employees. One of these employees has asked for a $1000 advance on their payroll. The advance was approved by the board, and the employee is going to pay it back with deductions of $50 in subsequent paychecks. But nobody involved knows exactly what to do.

First, it’s best to create some kind of memo laying out the advance and its repayment terms, to be signed by the employee and their supervisor (here, probably the board chair). Next, call your payroll processor. Ask them to generate a paycheck for the employee for the gross amount, no payroll taxes withdrawn. Otherwise, the employee will be taxed twice on this thousand dollars—once when they receive the advance, and once again as they pay it back in increments of fifty dollars (each of which is deducted from the net paycheck after taxes).

Now, how do you book the advance? It would be incorrect to show it as a normal salary expense, because it represents an advance on salary that hasn’t yet been earned. It’s moving forward in time, so to speak, so it is more correctly shown as a balance-sheet transaction, along the same lines as a prepaid expense. Record it with a journal entry debiting (increasing) an Advance Payroll asset account and crediting (decreasing) your cash. If it’s part of a larger payroll, you can quite tidily tuck this into your usual payroll entry by adjusting the credit to cash—your processor’s report will give the correct amount—and adding in the Advance Payroll debit.


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