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Payroll Accounting with Payroll Journal Entry Examples

(Last Updated On: October 3, 2018)

Lesson 12 in the Basic Accounting series

What is Payroll Accounting?

Payroll accounting is simply recording the payroll expenses of a business into the general ledger.   

Payroll accounting involves both expense and liabilities accounts such as FICA Taxes Payable, Federal and State Income Tax Payable, Health Insurance Premiums Payable, etc.

Accounting for those taxes can get a little complex. This article will show you examples of small business accounting payroll entries.

Let me start out by saying payroll is one area of small business accounting that I recommend getting professional help or using payroll software.

There are many federal, state, and local laws that regulate payroll.

Keeping up to date on all of them can be a hard task.

There can also be fees and penalties for improperly handling your payroll.

However, even if you have a payroll service provider, it is important to know the basics of payroll accounting as you are the one that is ultimately responsible for your payroll.

Payroll Accounting vs Accounts Payable

To begin with, let me point out the difference between accounts payable that we discussed in the previous accounting lesson and payroll.

Accounts payable is a current liability account in your chart of accounts that accounts for invoices that your business owes and pays. 

Payroll is defined as the cost that your small business accrues as part of paying your employees. It is a current liability account too, but is recorded separately from accounts payable entries. 

Payroll is not just one account. It is made up of expenses and payroll payable accounts, such as;

  • wages
  • salaries
  • payroll taxes
  • payroll withholding

Payroll Accounting Basics

Small business accounting payroll involves both expense and liability accounts.

Gross earnings are recorded using expense accounts such as salary or wage expense. Net pay for your employees is recorded using liability accounts such as net payroll payable, wage payable, or accrued wages payable.

Payroll liability accounts such as FICA (social security and medicare) tax payable and federal income tax payable are used to record withheld amounts owed to third parties.

The following is an example of some of the accounts you may set up to manage and record your payroll:

  • Salary or Wage Expense
  • FICA (Federal Insurance Contributions Act) Tax Payable
  • Federal Income Tax Withholding Payable
  • State Income Tax Withholding Payable
  • 401K Payable
  • Health Insurance
  • Wage Payable (employee’s net pay or take home pay)
 

What is Included in an Employer Payroll Tax Expense?

Since the business withholds a portion of the employees wages, it does not pay for all of them and as such, a portion of payroll tax is an expense to a business.  The payroll tax that is actually an expense to an employer includes the actual employer contributions to Social Security and Medicare plus any state and federal unemployment taxes.

What is Not an Employer Payroll Tax Expense?

Even though the employer is required to withhold contributions made by the employee federal income tax, state taxes (though some states do not have a state income tax) Social Security and Medicare are not going to be recognized as payroll tax expenses by the business since they are paid by employee through deductions from their paycheck.

Payroll Journal Entry Examples

In this section of small business accounting payroll , we will use a fictitious company to provide examples of journal entries to record gross wages, payroll withholding, and related payroll costs.

These general ledger entries can be used in a manual accounting system and also in a computerized accounting system such as QuickBooks. (For QuickBooks, simply click on “Company” then go to “Make General Journal Entries” and enter your payroll journal entries.)

Payroll Journal Entry Examples:

ABC Company has one employee, Mary Smith, that is paid weekly. The examples below are a typical weekly payroll journal entry which includes her gross wages, payroll withholding, and ABC Company’s cost.

#1 – Payroll Journal Entry Wage, Payroll and Insurance

Date     

Account Names                              

Debit          

Credit          

3/1

Wage Expense

720.00

 
 

FICA Taxes Payable (7.65% x 720)

 

55.08

 

Federal Income Tax Payable

 58.00
 

State Income Tax Payable

 21.00
 

Health Insurance Payable

 50.00
 

Wages Payable

 535.92

When ABC Company issues Mary her paycheck for the most recent pay period, they would post the following entry to decrease (debit) the Wage payable account balance and payroll tax balance and decrease (credit) cash. (In computerized accounting systems such as QuickBooks…you will credit the bank account you are paying your employee from.)

#2 – Payroll Journal Entry for Salary Payable

3/1    

Wage Payable        

535.92     

 
 

Cash

 

535.92

In addition to the wages and withholding in the previous payroll journal entries, ABC Company has incurred additional payroll liability expenses that must be recorded.

These expenses include their share of Mary’s FICA, ABC Company’s estimated cost for unemployment tax, worker compensation insurance, and ABC Company’s portion of Mary’s health insurance.

#3 – Payroll Journal Entry Payroll Taxes Payable

3/1       

ABC CO FICA Expense                                     

55.08         

 
 

Unemployment Tax Expense

3.00

 
 

Workers Comp Insurance Expense

20.00 
 

Health Insurance Expense

50.00 
 

ABC Co FICA Payable

 55.08      
 

Unemployment Tax Payable

 3.00
 

Workers Comp Insurance Payable

 20.00
 

Health Insurance Payable

 50.00

When it comes time to pay the payroll payable such as FICA and Federal Income Tax Payable, you would simply debit the payable accounts you are paying and credit cash.

Previous Section: Sales Tax Accounting

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