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    Set up a payroll item for retirement benefits (401K, Simple IRA, etc.)

    Article ID: 1000706

    Overview

    This article has the instructions and details on setting up benefits using both EZ and Custom Setup in QuickBooks for 401(k), 403(b), 408(k)(6) SEP, Elective 457(b), 501(c)(18)(D), and SIMPLE IRA.

    Details

    What are retirement plans?

    A 401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post and/or pre-tax basis. Employers may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit sharing feature to the plan. Earnings accrue on a tax-deferred basis.

    There are two types of 401(k) plans, standardized and non-standardized. If the plan is standardized, all compensation is considered wages subject to consideration when calculating a deferral. For example, Jane is deferring 10% to her 401(k) plan, and she receives a big commission check for $10,000. Under a standardized plan, there is no option--$1000 would be deferred for the 401(k).

    If it is a non-standardized plan it has its own characteristics. It is possible that a non-standardized plan allows an employer or employee to choose not to contribute certain types of pay for retirement deferral.

    All qualified deferred contribution plans have an annual contribution limit. Such employee contributions are exempt from federal income tax withholding (and in most cases state income tax withholding) but they are subject to Medicare, social security and FUTA taxes.

    These instructions apply to the following retirement plans:

    • 401(k)
    • 403(b)
    • 408(k)(6) SEP
    • Elective 457(b)
    • 501(c)(18)(D)
    • SIMPLE IRA

    There are 2 ways to set up a payoll item for retirement benefits:

    EZ Setup (uses standard settings; recommended for most users)

    Note: EZ Setup automatically adds the company contribution payroll item for retirement plans.
    1. From the QuickBooks menus at the top, click Lists > Payroll Item List.
    2. At the lower left of the Payroll Item List, click Payroll Item, and click New.
    3. Select EZ Setup and click Next.
    4. Follow the onscreen instructions.

      Note: If you have an employee who has local income tax that is not reduced by retirement benefits such as 401k, you will need to deselect that local tax item in the Taxes window of the payroll item set up. Also, there are help topics to assist you at the right side of each screen.
    5. After you create a payroll item, edit the payroll item to make sure all necessary vendor information has been entered. Important: Be sure not to adjust or change preset tax settings.

    Custom Setup (allows editing of settings; recommended for experts)

    1. From the QuickBooks menus at the top, click Lists > Payroll Item List.
    2. At the lower left of the Payroll Item List, click the Payroll Item button > New.
    3. Select Custom Setup and click Next.
    4. Select Deduction and click Next.
    5. Enter a name for the item in the Enter name for deduction box and click Next.
    6. In the Liability account drop-down list at the bottom, select the liability account that will be used to track this deduction and click Next. You can also enter the name of the plan administrator, along with any identifying account information.
    7. In the Tax tracking type window, select the tax tracking-type classification that matches your plan type and click Next.
    8. Place a checkmark next to any item(s) in the Payroll Item column that will be calculated after this deduction is taken. For example, if you check Federal Withholding, federal withholding tax will be calculated on the adjusted (after deduction) gross wages.
    9. Click Next.
    10. In the Calculate Based on Quantity window, select Neither and click Next.
    11. If the Gross vs. net window appears: if the amount of deduction is a percentage (%) of employee's gross earnings, select gross. If it is a fixed dollar amount select net. If calculation varies from one employee to another, you will need to set up separate items. Taxability of item is based on tax tracking type selected, not by gross vs. net calculation.
    12. Click Next.
    13. If the same deduction rate or amount applies to all or most employees, enter it into the field at the top of the Default Rate and Limit window. The annual deduction limit (if any) should be entered into the lower field only if the limit is the same for all or most employees.
    14. Click Finish to complete the payroll item setup for the retirement plan deduction.
    15. If the deduction amount is different for some employees, access those employee profiles and edit the deduction amount.

    You may also need to perform the following:

    To set up a retirement plan company contribution item using Custom Setup:

    1. From the QuickBooks menus at the top, click Lists > Payroll Item List.
    2. At the lower left of the Payroll Item List, click the Payroll Item button > New.
    3. Select Custom Setup and click Next.
    4. Select Company Contribution and click Next.
    5. Enter a name for the contribution and click Next. Do not use the same name entered for the employee deduction.
    6. In the Liability account drop-down list, select the same liability account that you chose earlier.
    7. Select an expense account from the Expense account drop-down list, and click Next.
    8. In the Tax Tracking Type window, select the tax tracking-type classification that matches your plan-type and click Next three times.
    9. If the same contribution rate or amount applies to all or most employees, enter it into the field at the top of the Default Rate and Limit window. The annual contribution limit (if any) should be entered into the lower field only if the limit is the same for all or most employees. If you want a limit for retirement, enter the 50+ rate here as the lower limit has priority.
    10. Click Finish to complete the payroll item setup for the employer contribution.
    11. If the contribution amount is different for some employees, access those employee profiles and edit the contribution amount.

    To add the new payroll items to the employee record:

    1. From the QuickBooks menus at the top, click Employees > Employee Center.
    2. Double-click the employee in question to open the Edit Employee window.
    3. Open the payroll info tab:
      • QuickBooks 2012 and below: From the Change tabs: drop-down list, select Payroll and Compensation Info.
      • QuickBooks 2013 and higher: Click the Payroll Info tab.
    4. In the Additions, Deductions and Company Contributions section:
      1. Click under Item Name to bring up drop-down list.
      2. Select the new payroll item(s) for the retirement plan(s).
    5. Check the box for Employee is covered by a qualified pension plan , if employee participates in a 401(k), 403(b), 408(k)(6) SEP, or SIMPLE IRA plan.
    6. Click OK.
    7. Repeat these steps for each eligible or participating employee.
    Note: For information on setting up Roth contributions, click here.

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