How to Create an Employee Advances in QuickBooks

Introduction

Managing employee advances efficiently is an essential aspect of running a business. An employee advance, also known as a salary advance or cash advance, is a loan given by the company to an employee, which is usually deducted from their future paycheck. QuickBooks makes it easy to track, manage, and record these advances, ensuring that both the advance and its repayment are properly accounted for in your financial records.

In this guide, we will walk you through the process of creating and managing an employee advance in QuickBooks, ensuring that your books remain accurate while giving your employees the financial support they need.

Why Use QuickBooks to Manage Employee Advances?

1. Accurate Record-Keeping: QuickBooks ensures that employee advances are properly documented, making it easy to track how much has been given and how much is still owed.
2. Automated Repayment: You can set up automatic deductions from future paychecks to repay the advance, reducing manual work and minimizing the chances of errors.
3. Simplifies Payroll: Managing employee advances through QuickBooks simplifies payroll processing by integrating the advance repayment directly into your payroll runs.
4. Clear Audit Trail: With QuickBooks, you create a clear audit trail, which is useful during tax time or if you ever need to review the financials related to employee loans.

Step 1: Create a New Account for Employee Advances

Before issuing an employee advance, you need to set up a specific account in QuickBooks to track the loan. This will allow you to easily monitor the amount given as well as repayments.

1.1: Set Up an Employee Advance Account

1. Log Into QuickBooks: Use your login credentials to access QuickBooks Online or QuickBooks Desktop.
2. Go to Chart of Accounts: Click on the Gear Icon (for QuickBooks Online) or Lists > Chart of Accounts (for QuickBooks Desktop) to open the Chart of Accounts.
3. Create a New Account:
   • For QuickBooks Online: Click New at the top of the Chart of Accounts page.
   • For QuickBooks Desktop: Click Account > New.
4. Select Account Type: Choose Other Current Assets as the account type.
5. Name the Account: In the Account Name field, type in "Employee Advance" or "Employee Loans" to make it clear what the account is used for.
6. Save the Account: Click Save or Save & Close to create the account.

This new account will track all amounts you lend to employees, as well as repayments made on those advances.

Step 2: Issue an Employee Advance

Once you've created the Employee Advance account, you can now record the advance given to the employee.

2.1: Create a Check or Bank Transfer

There are two ways to record the advance: either by writing a check or recording a bank transfer.

Option 1: Write a Check

1. Go to + New > Check: In QuickBooks Online, click the + New button and select Check. For QuickBooks Desktop, go to Banking > Write Checks.
2. Choose the Bank Account: Select the bank account from which the advance will be paid.
3. Payee Name: In the Payee field, enter the employee’s name.
4. Enter the Advance Amount: In the Amount field, enter the amount of the advance.
5. Account Category: In the Category or Account column, select the Employee Advance account you created earlier.
6. Add Memo (Optional): Add a memo to indicate that this check is for an employee advance.
7. Save the Check: Click Save and Close to complete the transaction.

Option 2: Record a Bank Transfer

1. Go to + New > Transfer: In QuickBooks Online, click + New, then select Transfer. In QuickBooks Desktop, go to Banking > Transfer Funds.
2. Transfer From and To: In the Transfer From field, select the bank account from which the funds will be taken. In the Transfer To field, select the Employee Advance account.
3. Enter the Amount: Input the amount of the advance.
4. Save the Transfer: Click Save and Close to record the transfer.

Step 3: Set Up Repayment Deductions

Once the advance has been given, you’ll need to set up a repayment plan where amounts will be deducted from the employee’s future paychecks. You can automate these repayments using QuickBooks’ payroll features.

3.1: Set Up a Deduction Item for Payroll

1. Go to Payroll Settings: In QuickBooks Online, go to the Gear Icon > Payroll Settings. In QuickBooks Desktop, go to Lists > Payroll Item List > New Payroll Item.
2. Create a Deduction Item: Create a new deduction item and name it something like "Employee Advance Repayment."
3. Select Account: Link this deduction item to the Employee Advance account you created earlier. This will ensure that the repayments are credited back to this account.
4. Set the Amount: If the repayment will be a fixed amount per paycheck, enter this amount here.

3.2: Apply the Deduction to the Employee’s Paycheck

1. Go to Payroll > Employees: In the left-hand menu, go to the Payroll section and select Employees.
2. Edit Employee Information: Find the employee who received the advance and edit their payroll details.
3. Add Deduction: Under the deductions section, add the "Employee Advance Repayment" deduction item you just created.
4. Set the Repayment Amount: Input the amount that will be deducted from each paycheck.
5. Save the Changes: Click Save to apply the deduction to future payrolls.

Now, when you run payroll, QuickBooks will automatically deduct the repayment amount from the employee’s paycheck until the advance is fully repaid.

Step 4: Track Employee Advance and Repayments

Once you’ve set up the deduction, QuickBooks will automatically track the balance of the employee advance as it is repaid through payroll deductions.

4.1: Review the Employee Advance Account

1. Go to Reports > Balance Sheet: Run a Balance Sheet report and look for the Employee Advance account under the Other Current Assets section.
2. Review Transactions: Click on the account to review all transactions, including the original advance and repayments.

4.2: Generate a Detailed Report

1. Go to Reports > Transaction Detail by Account: Run a Transaction Detail by Account report.
2. Filter by Employee Advance: In the report filters, select the Employee Advance account to see all transactions related to employee loans.
3. Review the Repayment Progress: Use this report to monitor how much has been repaid and how much is still outstanding.

Step 5: Adjust or Stop Repayments (If Necessary)

If you need to adjust the repayment terms or stop repayments (for instance, if the employee has fully repaid the advance), you can do so by editing the employee’s payroll deductions.

5.1: Adjust the Deduction Amount

1. Go to Payroll > Employees: In QuickBooks, go to the Payroll section and select the employee’s payroll details.
2. Edit the Deduction: Under the deductions section, adjust the repayment amount as needed.
3. Save Changes: Click Save to apply the new repayment amount.

5.2: Stop the Deduction

Once the advance is fully repaid, you can remove the deduction from the employee’s payroll.

1. Go to the Employee’s Payroll Settings: Open the employee’s payroll details.
2. Remove the Deduction: Delete the "Employee Advance Repayment" deduction.
3. Save Changes: Click Save to finalize the changes.

Step 6: Handle Tax Implications (Optional)

While employee advances themselves are not taxable, they can have tax implications if the advance is forgiven or if there are other special circumstances. It’s always best to consult with a tax professional if you’re unsure how to handle advances on your financial statements or tax returns.

Conclusion

Tracking employee advances in QuickBooks is a straightforward process that helps you manage loans to employees while ensuring your financial records stay accurate. By following the steps outlined in this guide, you can easily create, track, and manage employee advances, along with setting up automated repayment schedules.

Properly managing employee advances not only simplifies payroll but also ensures that both the company and the employee have a clear understanding of loan amounts and repayment terms. For more QuickBooks tips and tutorials, explore additional resources and guides.