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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, usually through a Payroll Service Provider (PSP) such as Gusto, ADP or QuickBooks Payroll. The PSP withholds, files and pays your employer and employee payroll taxes to the relevant authorities on your behalf (under IRS rules, your business stays responsible for those taxes). Typically, businesses engage the PSP directly or via their accountants.
If you pay money to third parties or to yourself directly (that is, not using a PSP), these payments are likely NOT salaries but rather contractor payments, owner draws, reimbursements to employees, employee benefits, or other non-salary payments.
You may land here from the Year-end Hub (the employer taxes question) or from the instructions on the 1099 tracking page. If you use Gusto, your Gusto payroll is reconciled automatically, so you only need to review salary paid outside Gusto.
Use the steps below to review your payroll related transactions and ensure they are categorized correctly in Finaloop.
1. Reviewing your payroll-related transactions
To review your payroll related transactions:
Open your payroll-related transactions. This opens Transactions filtered to the payroll categories: Salaries & wages, Officer compensation, Employer taxes, Employee taxes, Pensions & retirement, Salaries & wages - employee benefit programs, Reimbursements to employees and Vacation pay.
In the date range field next to the search box, choose the year you're closing (for example Year 2025).
Ask yourself: Is my business formally running payroll and paying payroll taxes through a PSP or an Accountant?
Note: If you'd rather set the filter yourself, click the Filters icon, select the categories above under Category (keep Include selected), then click Apply. The Category filter isn't available while Waiting for your input is checked.
2. If the answer is YES: You are running payroll
How to categorize these transactions
On the Transactions page, click the transaction's category to open Categorize transaction.
Check that Payee shows your Payroll Service Provider.
Under What type of payment to [your provider] is this?, choose the option that fits, such as:
Salaries & wages for salary payments
Payroll taxes for employer payroll tax payments (Finaloop asks a few follow-up questions)
Subscription & service fees for payroll processing fees
More than one of the categories above if one payment covers several of these
Click Next and answer any follow-up questions.
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.
① Payee ② What type of payment to [your provider] is this?
3. If the answer is NO: You are not running payroll
The transactions should not be categorized as Salaries but rather as:
Contractor payment: if paid for direct services.
Owner's draw: if paid to one of the owners in the business, not for direct services (also called a distribution).
Reimbursements 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, open Categorize transaction as described above, add the relevant person as the Payee, and change the category accordingly.
If you file a Schedule C
If your business is a sole proprietorship or a single-member LLC that files a Schedule C, you're not an employee of your business, so you can't pay yourself a salary. Categorize payments to yourself as Owner's draw. Officer compensation doesn't apply to your business.
4. What happens next
In the Year-end Hub, you'll be asked for the total employer taxes you paid for the year. Employer taxes are taxes imposed on the employer only, for salary payments made. They don't include employee taxes (taxes withheld from your employees' salaries). Your payroll provider's reports for the year show this amount.
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Need help?
Email us at [email protected] and we'll help you get your payroll categorized correctly.