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This article helps you review and correct salary and payroll categorization, especially during year-end close. Correctly classifying salary related transactions is critical for accurate financial statements, proper tax reporting, and clean 1099 and W-2 preparation.
In general, salaries apply only to payments made to employees who are formally and legally on your payroll through a Payroll Service Provider (PSP). The PSP is responsible for paying your employer and employee taxes to the relevant authorities. Typically, businesses engage the PSP directly or via their accountants.
The PSP is responsible for paying your employer and employee taxes to the relevant authorities. Typically, businesses engage the PSP directly or via their accountants.
If you pay money to third parties or to yourself directly (i.e., not using a PSP), these payments are likely NOT salaries but rather - contractor payments, owner draws, reimbursement to employees, employee benefits, or other non-salary payments.
Use the steps below to review your payroll related transactions and ensure they are categorized correctly in Finaloop.
Reviewing your payroll-related transactions
To review your payroll related transactions:
Click here to view all the 2025 transactions in your bank feed that are payroll related.
Note: To review these transactions for other years, click on the Filter button and adjust the dates accordingly. Then click Apply.
2. Ask yourself - Is my business formally running payroll and paying payroll taxes through a PSP or an Accountant?
If the answer is YES: You are running payroll
How to categorize these transactions
In the Transactions screen, set the Payee to the name of your Payroll Service Provider (see in green).
Review and assign the correct category (see in yellow), such as:
Salary or Officer Compensation (if you pay salary to the owner or a very senior employee)
Payroll taxes for employer payroll tax payments
Service fee for payroll processing fees
Note:
If your accountant runs payroll but you pay employees directly, you may use the employee’s name as the payee instead of the PSP, as long as payroll taxes are still being filed and paid correctly.
If the answer is NO: You are not paying payroll.
The transactions should not be categorized as Salaries but rather as:
A ‘Contractor payment’ - if paid for direct services.
An ‘Owners draw’ or ‘Distribution’ - if paid to one of the owners in the business, not for direct services.
‘Reimbursement to employees’ - if paid back to an employee for expenses they incurred while working.
‘Employee benefits’ - compensation provided to employees in addition to their regular salaries or wages.
Other business expenses as may be relevant.
In each of these cases please add the relevant person as a Payee, and change the Category accordingly.