When you run a payroll in Gusto. It automatically creates a bill in Xero that allocates the appropriate amounts to the appropriate categories. Then you simply match up the bank transactions to the bill to reconcile.
Step 1: Integrate Gusto with Xero
The integration from Gusto to Xero allows the payroll to automatically create a bill in Xero outlining the correct amount of wages and taxes for each pay period.
When logged into Gusto, you will need to Click Settings—Add new Integration
Log into Xero and Allow Access to your Xero Account
Step 2: Setup Xero Mapping with Departments
When starting payroll you may have to run payroll for just yourself or you and your employees.
You typically want to separate out yourself as the officer from the employees. As a result I recommend creating an “Officer Wages” and “Employee Wages” Account to keep those separate in your financials. In order to do we first go to Xero and create the necessary accounts in your chart of accounts. Link to COA blog post
Log into Xero. Click on Settings—-Chart of Accounts. Add a new account for each of the above.
Payroll Tax Expense
Payroll Wages Payable
Payroll Tax Payable
Once the accounts are created, you need to create departments in Gusto. That way it knows how to direct the officer wages to officer wages and employee wages to employee wages.
Creating Departments in Gusto
Click on People and then departments
Once the departments are created you will click the manage button to put each person inside of your business in the correct department.
Finally, you will want to perform Xero mapping.
Click on settings and edit.
Step 3: Run Payroll in Gusto
Once you run payroll in gusto you get a summary page showing the details of the taxes and payments to employees. There are typically 2 withdrawals from your bank account
- Direct Deposits for Employees
- Employer & Employee Taxes
Step 4: Approve Bill in Xero
After you run a payroll in Gusto. Through the integration, Gusto pushes a bill to Xero drafts automatically.
On the dashboard, you will see that your draft bills now has a bill there.
You will need to go in and approve the bill, so you have the ability to “Match” it during the reconciliation process.
Step 5: Match Bank Reconciliation to Bill
Now that the bill is approved. You will need to reconcile the two bank transactions. $1,147.37 is labeled Gusto Tax for the taxes spent for both employer and employee. The $2,800.47 is the withdrawal of the direct deposits for the employee net paychecks.
Since there are two amounts that total the bill of $3,947.84 it will not match up automatically by turning green. So you will have to click the “Find and Match” on the $2,800.47 bank transaction.
You will then have to select the bill that this payment belongs to and click the “split” button since it doesn’t equal the total.
Once the split button is clicked, a box will pop up and auto fill the amount on this bank transaction of $2,800.47.
Click Split. Then the transactions will light up and green and click reconcile to clear the transaction.
The next bank transaction of $1,147.37 is typically the remaining payment on the bill. As a result I typically just refresh the page and it will automatically turn green.
Once you complete the steps above, Gusto and Xero will now be integrated and you will be easily able to easily record payroll in your accounting. When you pull your financials to review, salaries, payroll taxes, and payroll liabilities should all be allocated in the correct categories allowing you to make payroll business decisions.