In any organization, one crucial element is always at play: money. Up to 50 percent of most annual budgets can go towards the salaries you pay team members and staff, which means keeping track of the money on payday is just as important as the business being run.
Payroll journal entries are the optimal way to track these payroll expenses with minimal stress for in-person employees and any hybrid or remote staff you might employ. Using a payroll service in the everyday happenings of the office is a great tool to help alleviate the complications of bookkeeping.
It’s a bit like sorting out your checkbook balance. If you’re familiar with that process, then introducing a payroll journal entry into your routine should be like taking the training wheels off of a bike.
Payroll journal entries are an effective way for organizations of any size to keep track of the gross wages of their staff and all compensation. This way, you can easily look back over any pay period and be able to see the total amount of accrued wages, gross pay, and any other payroll transactions.
In this article, we’re going to be discovering how to master this fundamental step of payroll accounting by learning about how to prepare and record payroll journal entries.
What is a payroll journal entry?
A payroll journal entry is a tracked account of all the payroll expenses being divvied out in the form of salaries and other payroll-related items. These financial entries are included in the organization’s financial statements through the general ledger, helping to streamline the storing of everything to do with employee wages and more.
There are a handful of expenses that a payroll journal entry will record. Here are a few examples of what your accountant might document within an accounting period:
Employee compensation
This would be any form of compensation that an employee might receive in return for their work. Most often, that’s monetary with a bi-weekly salary, but it could also look like extra time off, paid time off (PTO), or a bonus.
Benefits
Individual or team benefits might include compensation for someone’s work in addition to the money they routinely receive. These benefits could include a retirement plan, organization shares, or insurance policies.
Employer taxes
This item is any money paid by the employer or organization to the government as taxes every year. Major kinds of taxes would be state income taxes, federal income taxes, state unemployment taxes, federal unemployment taxes, or taxes for health insurance or other premiums.
Payroll taxes
A payroll tax expense would be all the money an organization pays for taxes that are directly correlated to the salary expense of employees’ pay, like social security tax or Medicare taxes.
Deductions
Payroll deductions are the withholdings an organization automatically takes from a paycheck to go toward that individual’s taxes. Net pay — meaning how much an employee actually receives in a paycheck – is the amount after deductions have been made. Every tax season, you’ll find this amount in withholdings on your W2.
Streamlining your accounts with these non-negotiable elements could be the difference between a quarter on Cloud 9 or ripping your hair out in frustration. Why make it harder on yourself? Payroll journal entries are in place to work for you.
Types of payroll journal entries
So we’ve been talking about payroll journal entries, but what do they look like? What different types of entries are there? The three main examples are:
- Initial entries
- Accrued wages
- Manual payments
Let’s explore each in-depth below.
Initial recordings
Initial recordings are exactly what they sound like — the front lines of the entries recorded for payroll accounting. They’re the entries you’ll find before others within a general ledger that document a transaction. They include team members’ wages and their tax withholdings.
A shortened example would look like this:
| Debit | Credit | |
|---|---|---|
| Salaries Expense | XXX | |
| Payroll taxes expense | XXX | |
| Social security taxes payable | XXX | |
| Medicare taxes payable | XXX |
Once you pay withheld taxes, including the organization portion of payroll taxes to the IRS, you can use this entry to reduce the cash account’s balance and eliminate the liability accounts’ balances:
| Debit | Credit | |
|---|---|---|
| Cash | XXX | |
| Social security taxes payable | XXX | |
| Medicare taxes payable | XXX |
Accrued wages
Accrued wages are wages owed by an organization but haven’t yet been paid. Toward the end of an accounting period, your accountant should clean up these entries as the organization begins paying them back to reflect the change.
Below, you’ll find another example of what this may look like:
| Debit | Credit | |
|---|---|---|
| Direct Labor Expense | XXX | |
| Salaries expense | XXX | |
| Accrued salaries and wages | XXX | |
| Accrued payroll taxes | XXX |
Manual payments
Here’s another straightforward type. Manual payments are payments paid … manually! This can be done through check or cash and is usually only done when an employee is let go or their payment needs a quick fix.
Here’s one final example:
| Debit | Credit | |
|---|---|---|
| Payroll expenses | XXX | |
| Payroll expenses tax | XXX | |
| Checking account paycheck 1 | XXX | |
| Checking account paycheck 2 | XXX |
Debits vs. credits in payroll accounting: What’s the difference?
Within the general ledger, each expense will be documented through a balance of debits and credits. To have a balanced ledger, the debits and credits must always add up to the same number. You can track each element with two columns to the right of the account in question: debits on the left and credits on the right.
When you are paying money out of the organization, you’re dealing with assets and liabilities. Think of assets like the money you have available to spend or a cash account. Another way to think about it formulaically is Assets = Liabilities + Owner’s Equity. Items in a liability account are owed but haven’t yet been paid.
If you’re getting lost in the logistics, here’s an example to help you visualize what the entry might look like.
Let’s say you’re doing business with a long-term supplier, and you owe them $1,500 for a recent delivery. This would be your liability or debit since you owe the amount, but it hasn’t left the account yet.
To balance this expense, you’d pay $1,500 as credit or cash asset (accounts payable). Because the debit and credit now have the same amount recorded, your entry is balanced, and all parties are satisfied.
With that general ledger concept understood, you’ll find the application to a payroll journal entry a breeze. Let’s break down how to record a payroll journal entry with these ideas.
How to record a payroll journal entry in 5 steps
Recording a payroll journal entry can either be done manually or through the use of accounting software. Either can get you the same results, but using accounting software is, by and large, the easier, more efficient way of getting there.
Let’s walk through a payroll journal entry example with a simple premise: have one team member pay at the end of a pay period (bi-weekly). And better yet, this employee only has to pay Federal Insurance Contributions Act (FICA) and federal income taxes, so there are no other expenses to worry about for now.
1. Compile your payroll data
| Gross Wages (Total Earned) | $2,243 |
| FICA Tax (S.S. and Medicare) at 7.65 percent | $171.59 |
| Federal Income Tax at 12 percent | $269.16 |
| Net Wages (Payroll Payable) | $1,802.25 |
2. Set up your debit column with payroll expenses (wages, salaries, benefits)
This is the initial setup of your expense for payroll, and because you haven’t actually paid the amount yet, this is just the amount owed (debit).
| Date | Account | Debit |
| 1/1/2023 | Gross Wages | $2,243 |
| FICA Tax | ||
| Federal Income Tax | ||
| Net Pay (Payroll Payable) |
3. Set up your credit column recording payables (taxes, net pay, and payroll deductions)
The items in the credits column should equal the total amount in the debit column. In this case, the deductions and net pay will equal the total gross wages your employee earned.
| Date | Account | Debit | Credit |
| 1/1/2023 | Gross Wages | $2,243 | |
| FICA Tax | $171.59 | ||
| Federal Income Tax | $269.16 | ||
| Net Pay (Payroll Payable) | $1,802.25 |
4. Review entries to ensure that debit and credit columns are accurate
Double-check all the information to ensure that what you’ve entered is accurate (or whatever software you use has entered things accurately).
| Date | Account | Debit | Credit |
| 1/1/2023 | Gross Wages | $2,243 | |
| FICA Tax | $171.59 | ||
| Federal Income Tax | $269.16 | ||
| Net Pay (Payroll Payable) | $1,802.25 |
5. Record outgoing payments (credits) and adjust your liabilities account (debits)
Now that you’ve recorded all the necessary information, all that’s left to do is to adjust your debits and credits once the payment has officially been made.
The net wages will no longer be a liability once they’ve been sent out on the next payday, and the amounts owed in taxes to the government that you withheld will be sent to their proper recipients. When your accounts are balanced, the columns should resemble this:
| Date | Account | Debit | Credit |
| 1/1/2023 | Cash | $1,802.25 | |
| Payroll Payable | $1,802.25 |
Both the amount owed to the employee and the amount you’ve paid to them on payday are equal. Both parties are satisfied, and the account is balanced.
Payroll journal entry examples
To help you visualize this process with different types of payroll journal entries, here are a few examples of the right way to craft your entry:
Initial recording entry
As mentioned above, this entry is the initial record of all the expenses owed and paid, including payroll tax, salary, and labor. The items included in this entry aren’t limited to those, however, as you could also be adding things like retirement 401k, various insurances, or other deductions.
| Item | Debit | Credit |
| Labor | X | |
| Salary | X | |
| Payroll Taxes | X | |
| Federal Tax | X | |
| Social Security Tax | X | |
| Medicare Tax | X | |
| Federal Unemployment Tax | X | |
| State Tax | X | |
| State Unemployment Tax | X |
Accrued wages entry
These will be all the expenses recognized in your account on the books that haven’t been paid yet. You’re “accruing” these expenses even though they haven’t physically been covered yet, as accrual happens at the end of some accounting periods.
| Item | Debit | Credit |
| Labor | X | |
| Salary | X | |
| Accrued Salary and Wage | X | |
| Accrued Payroll Tax | X |
Manual payment entry
A manual payment entry wouldn’t involve a bookkeeping element like other payroll entries. As stated above, a manual payment comes in the form of a check or cash in specific circumstances where an employee would need to be paid in this fashion.
Always remember that the expense accounts must be balanced before the transaction is considered closed. This means debits are always equal to credits.
Practical tips for recording payroll entries efficiently
If you’re still feeling a little unsure about implementing the daunting payroll entries and doing it well, here are some practical tips and tricks for getting the job done quickly and efficiently. This way, you can trust all your ducks are in a row regarding payroll journal entries and your balance sheet:
- Use payroll software
- Keep a backup spreadsheet
- Create an organization system for your employee’s tax forms
Optimize this process with payroll software
Keeping track of your organization’s spending is fundamental to managing resources successfully. While manually tracking your payroll expenses might seem like a more in-control way of handling things, implementing accounting software to help facilitate payroll processing and organization might just be the ticket to streamlined success you’ve been missing out on.
Automating processes like these allow you to take a portion of your attention and energy and spend it on new projects, relationships with team members, and growing your organizations in more ways than you had time for before — you’ll have time for the more important things than crunching numbers and worrying if it’s accurate.
We don’t know about you, but we’d say time for the more important things, and an automated, efficient system for payroll reports sounds like a pretty sweet deal.
