What are Payroll Entries?

Payroll Entries

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Payroll Entries

Payroll entries, also known as payroll journal entries, are the accounting entries businesses use to record their employees’ compensation. These entries reflect the total net pay to employees, the employer’s payroll tax liabilities, and other payroll costs.

These entries typically affect several different accounts, including:

Here is a basic example of what a payroll journal entry might look like:

  • Debit Salaries Expense $10,000
  • Debit Payroll Tax Expense $765
  • Credit Employee Income Tax Payable $2,000
  • Credit Social Security & Medicare Tax Payable $765 (employee’s portion)
  • Credit Social Security & Medicare Tax Payable $765 (employer’s portion)
  • Credit Cash (Net Pay) $6,235

This journal entry reflects a total gross pay of $10,000, with $2,000 withheld for income taxes, $765 for the employee’s portion of Social Security and Medicare taxes, and an additional $765 for the employer’s portion. The net pay to the employee (the amount deducted from the company’s cash) is $6,235.

Please note, the example above is simplified. Payroll can be quite complex, and a real-world payroll entry might have many more lines to account for things like state taxes, different types of deductions, and more. Furthermore, it’s recommended to consult with a certified accountant or a payroll professional to handle payroll accounting correctly.

Example of Payroll Entries

Let’s use a concrete example to demonstrate how payroll entries work in practice. Assume a small business, “Bright Start”, that has one employee: Jane. Jane earns $1,000 per pay period.

  • Gross Pay : Jane’s gross pay is her total earnings before any deductions. In this case, it’s $1,000.
  • Deductions: Jane’s employer must deduct $150 for federal income tax, $50 for state income tax, and $76.50 for FICA taxes (7.65% of $1,000). Jane also contributes $100 to her 401(k) retirement account.
  • Employer Payroll Taxes: Bright Start also has to pay the employer’s portion of the FICA taxes, which is another $76.50.

Here is how these transactions might be recorded in the company’s books:

  • Debit: Salary Expense (Gross Pay): $1,000
  • Credit: Federal Income Tax Payable: $150
  • Credit: State Income Tax Payable: $50
  • Credit: FICA Taxes Payable (Employee’s Portion): $76.50
  • Credit: 401(k) Payable: $100
  • Credit: Cash (Net Pay): $623.50

The company would also record its own payroll tax expense:

  • Debit: Payroll Tax Expense: $76.50
  • Credit: FICA Taxes Payable (Employer’s Portion): $76.50

In this example, Bright Start has recorded the gross pay to Jane as an expense, withheld the necessary taxes and 401(k) contributions from Jane’s pay, and recorded its own payroll tax expense. Jane’s net pay (the amount actually paid to her) is $623.50. The taxes and 401(k) contributions are recorded as liabilities, reflecting the fact that Bright Start owes these amounts to the government and the 401(k) plan.

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