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:
- Salaries or Wages Expense: This account reflects the total gross pay earned by employees during the pay period. It’s an expense account, which means it reduces the company’s net income.
- Payroll Tax Expense: This account records the employer’s portion of payroll taxes, such as Social Security and Medicare taxes in the U.S.
- Liabilities Accounts: These accounts reflect the amounts that the company owes but has not yet paid. There are usually several payroll-related liability accounts, including:
- Employee Withholdings: These are amounts that the company has withheld from employees’ pay for income taxes, employee portions of Social Security and Medicare taxes, and any other deductions like retirement plan contributions or insurance premiums.
- Employer Payroll Taxes Payable: This account reflects the employer’s portion of payroll taxes that have been incurred but not yet paid.
- Net Pay: This is the total amount paid out to employees, usually through checks or direct deposits. This is recorded as a decrease in the company’s cash account.
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.