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;
- 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 payroll liability accounts such as net payroll payable, wage payable, or accrued wages payable.
Payroll liability accounts such as FICA (Social Security and Medicare), along with state and federal income tax payable are used to record withheld amounts owed to the Internal Revenue Service and other 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 the employees’ paychecks.
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 of a payroll transaction.
Payroll transactions are posted to the general ledger and can be used in a manual accounting system and also in accounting software such as QuickBooks. (For QuickBooks, simply click on “Company” then go to “Make General Journal Entries” and enter your payroll entry.)
Payroll Journal Entry Examples:
ABC Company has one employee, Mary Smith, that is paid weekly. The payroll process examples below are a weekly payroll journal entry which includes her gross wages, payroll withholding, and ABC Company’s cost.
#1 – Payroll Journal Entry Wage, Payroll and Insurance
FICA Taxes Payable (7.65% x 720)
Federal Income Tax Payable
State Income Tax Payable
Health Insurance Payable
When ABC Company issues Mary her payroll check for the most recent accounting period, they would post the following entry to decrease (debit) the Wage payable account balance and payroll tax balance and decrease (credit) cash. (In accounting software such as QuickBooks…you will credit the bank account you are paying your employee from.)
#2 – Payroll Journal Entry for Salary Payable
In addition to the gross pay and withholding in the previous payroll journal entries, ABC Company has incurred additional payroll liability expenses that must be recorded.
The total amount of 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
ABC CO FICA Expense
Unemployment Tax Expense
Workers Comp Insurance Expense
Health Insurance Expense
ABC Co FICA Payable
Unemployment Tax Payable
Workers Comp Insurance Payable
Health Insurance Payable
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.