What Is a Payroll Clearing Account?

Companies use payroll clearing accounts as intermediate bank accounts to handle the payment of employee checks and direct deposits. These accounts may not be used to pay the company's day-to-day operating expenses. Keeping these items separate enhances security and assists in the tracking and reporting of employee pay, taxes and benefits.

Calculate each employee's salary or hourly wages for the pay period. Use the employee's W-4 form and benefit election forms to calculate federal and state withholding taxes, Social Security tax, Medicare tax and voluntary deductions for retirement plans, medical insurance and other discretionary fringe benefits. Issue a check or send direct deposit instructions for the net amount after taxes and deductions.

A payroll clearing account is a separate bank account the company uses only to pay employees. Total all employee checks and direct deposits to find the amount of money that must be transferred into the payroll clearing account. The transferred money must be available for withdrawal before you release the employees' checks or process any direct deposits.

Running your payroll transactions through a clearing account makes it easier to reconcile your reports at the end of the accounting period. Because the balance in account should be zero between pay periods, you can quickly spot outstanding checks that have not been cashed by employees. The bank statement will have fewer transactions for you to look through because it contains only payroll information. Using a payroll clearing account also keeps your company's operating account separate from the account that issues the employees' checks. If the payroll account is compromised, you can simply close the old account and set up a new one with no effect on your company's main operating account.

A clearing account adds more steps the payroll process. This can be time-consuming and increases the chance of making an error. If your company has only a few employees, the extra work of transferring funds into the clearing account may not be worth the extra effort. You will also miss out on interest earnings while the funds are in the payroll account waiting for employees to cash their checks. There is always a risk of a problem occurring with the payroll transfer and the employees' checks bouncing.