Benefits are a vital component of creating an excellent place to work.
Health insurance and a 401(k) plan have become part of the standard package for any employee looking for work! If your company offers these essential benefits, you're already on your way to providing well for your team.
Accounting for health insurance costs is another story.
Your company is billed directly for insurance, but your employees also contribute a percentage of their plan! How do we account for what your employee pays for their health insurance and what the company pays?
What's the best way to account for health insurance in QuickBooks Online?
Start With the Basics
Before we dive into the accounting treatment for health insurance, we need to understand a few things about the plan itself.
Your company-sponsored health insurance plan is most likely billed directly to the company. With that in mind, we need to understand the total monthly cost of your plan, your company's payroll cadence, and your employee/employer contribution split.
For example, let's assume that the total cost of your health insurance plan is $1,000 per month.
We'll also assume that your company runs payroll on a semimonthly schedule, meaning that there are 24 pay periods per year.
Finally, your company pays 80% of your employee's health insurance plan. The employee pays 20% of their plan.
This information allows us to understand the total cost to your company and each employee per payroll, which will help us understand what we're accounting for.
These numbers show that total annual insurance costs are $12,000 per year (12 x 1,000) or $500 per pay period (12,000 ÷ 24).
Your employees are responsible for paying $100 per pay period (500 x 20%), while your company is responsible for $400 (500 x 80%).
From here, we need to understand which accounts these values correspond to within QuickBooks.
Health Insurance Becomes a Liability
The mechanics of health insurance can feel confusing for small business owners. Here's how it works:
Your insurance company bills the company directly for the full cost of your insurance. In this case, that's $1,000 per month!
When that transaction occurs, there are multiple components to it. On the one hand, the employee is responsible for 20% of their plan's cost. On the other, your company's cost is 80%. However, in a proper double-entry accounting system, employee and employer portions of that bill are accounted for once wages are earned and paid.
The bill from your insurance company - $1,000 - creates a current liability for your business. That liability is relieved as payroll is paid out. Typically, the account for that liability would be something like "Health Insurance Payable."
We'll get to how that works in just a moment.
Employee Deductions for Health Insurance Are Part of Wages
For all hours worked, an employee earns a wage. That wage is accounted for in the business's "Wages" expense account.
When an employee elects to join your health insurance plan, they pay for their portion of health insurance directly from their paycheck as a tax-deductible expense. They're allowing the company to withhold a portion of their wages for the cost of their health insurance plan.
In our example, if an employee earns a total of $2,000 in wages during this pay period, $100 will be withheld to pay for health insurance. That $100 is still part of your employee's earned wages, but it's being held by the company to be applied to the cost of health insurance.
For that reason, employee deductions for health insurance will ultimately end up recorded in your "Wages" expense account.
Employer Contributions for Health Insurance Are an Expense
The other half of this equation - the other 80% in this example - must be dealt with.
We know that employees pay 20% of health insurance costs directly from their wages. That's actively being withheld from their paycheck and applied to the cost billed to the company!
On the flip side, employer contributions are an expense to the company. Typically, this would go into a "Health Insurance Expense" account.
Putting it All Together
So, the pieces for accounting for your company's health insurance are clear. We understand all the components, but getting them into QuickBooks Online can be confusing.
Here are the exact debits and credits for our example entries using a Cash accounting system:
To accrue for the employer/employee contributions during one pay period:
Since there are two pay periods within a month, this last journal entry will happen twice, establishing the Health Insurance Payable liability of $1,000.
To establish the health insurance bill being paid:
Once the health insurance bill has been fully paid, the liability account is relieved and left with a balance of $0.
We've fully accounted for our health insurance benefits using these accounts!
While this may be clear to some, most business owners would greatly benefit from working with an experienced accountant or bookkeeper to ensure that all of their expenses are correctly accounted for.
That's why we're here to help!
What to Do In QuickBooks Online
Suppose you're working within a standard payroll software like Gusto, Run by ADP, or Rippling; you can set up an integration directly to QuickBooks Online to ensure that payroll gets properly booked to the necessary accounts every time without you needing to take any action. This is the easiest way to ensure that your health insurance deductions and expenses get booked into your accounting ledger within QuickBooks.
Keep in mind that health insurance is a component of payroll and typically isn't entered in as a journal entry by itself. Instead, it's typically included within your payroll journal entry.
You can create a journal entry within QuickBooks for your health insurance contributions by clicking the "New" button in the top lefthand side of QuickBooks Online.
From here, to create a new journal entry, click "Journal entry" under the section labeled "Other."
Enter the relevant accounts to create your new journal entry, and click "Save and Close" to finish.
When the health insurance bill is paid, and your liability needs to be relieved, you can do so by booking the expense to your health insurance liability payable. Simply create a new journal entry within QuickBooks following the previous steps and record your entry
There you have it! You've accrued for and subsequently relieved your health insurance liability.
Remember, this isn't tax advice.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Amarlo assumes no liability for actions taken in reliance upon the information contained herein.