Payroll Accounting: In-Depth Explanation with Examples

The payroll calculations are done using spreadsheets or through payroll software. Payroll means the company’s financial record of payments made by the employer to the employees, including wages, bonuses, salaries, incentives, etc. The company must prepare an employee’s payroll for all its employees from the time they are hired till retirement/resignation. Processing payroll without delays in accordance with various statutory compliances is a significant activity of a company. Maintaining a regular regime of recordkeeping and audits is like keeping the heartbeat of the payroll accounting function steady and strong.

Payroll Accounting Explained

Payroll processing requires you to complete a number of steps, which are presented below. Though some systems that incorporate more or less automation may not include all of these steps, the following process flow will apply to most payroll systems. Here are the five steps for performing payroll accounting effectively. A related account is Insurance Expense, which appears on the income statement. The amount in the Insurance Expense account should report the amount of insurance expense expiring during the period indicated in the heading of the income statement.

Employees’ benefits and insurance

These reports can range from detailed ledgers of payroll expenses to summaries required for tax purposes, like Form 941 for federal tax filings or unemployment tax forms. In the initial payroll entry, expenses for employee gross compensation and the employer’s portion of payroll taxes are listed as debits. Liabilities, such as tax withholdings payable to government agencies, are listed as credits. Once all taxes have been paid, the liability accounts are debited, and the cash account is credited. Employers should consult an accountant or tax attorney for more specific instructions. There are three types of entries – initial or primary payroll entry, accrued wages entry and manual payments entry.

Record payables

You may also need to pull reports for deductions, contributions, and other benefits. Strong reporting tools facilitate financial tracking and strategic planning. ADP simplifies payroll for a vast https://invyte.us/author/invyte/ international workforce, saving time and streamlining operations.

• When creating your own payroll accountant job description, make sure to mention these in requirements.
• Each state sets its own tax rates and wage base, which is the maximum amount of wages on which taxes are calculated.
• A sole proprietor is the owner of a business organized as a sole proprietorship and is not considered to be either an employee or an independent contractor.
• For example, courts of law may order employers to garnish (withhold money from) an employee’s salary or wages for purposes such as paying child support or repaying debts.

• Calculating payroll involves adding gross pay, reimbursements, bonuses and other additions – and then deducting taxes, provident fund contributions, medical insurance contributions, and other deductions.
• These specialists analyze spending, financial reports, budget efficiency, and performances to determine if and how the organization can improve its financial health.
• However, some states have set higher minimum wages, so businesses must comply with the higher rate if it applies to them.
• Payroll accounting refers to an organization’s record of an employee’s compensation, including benefits, payroll taxes and money deducted from wages.
• We’ll assume that the distributor’s accounting month and accounting year both end on Saturday, December 31.

They help and manage the salaries, wages, bonuses, and commissions payable to the business employees. In addition, the department works and determines the number of deductions be withheld from the salary payable as per the applicable legal and labor laws. (The other component of the FICA tax is the Medicare tax.) The Social Security tax is levied by the U.S. government on both the employee and the employer. In 2025 the Social Security portion of FICA (excluding Medicare) to be withheld from the first $176,100 of each https://www.mixedincome.org/what-are-the-challenges-of-maintaining-historic-affordable-housing/ employee’s annual salary or wages is 6.2%.

What is a payroll journal entry?

• The purpose of payroll accounting is to keep track of employee compensation and related payroll costs.
• The Federal Unemployment Tax Act (FUTA) requires employers to pay this tax.
• As the name suggests, these are wages that you owe your employees—wages you haven’t yet paid.
• Employees may have different pay structures – salaried, hourly, or contractual and each one needs a different way of calculating pay and taxes.
• Some companies allow employees to enter these changes through an employee-specific software module.

Payroll accounting also involves withholdings for items other than payroll taxes. For example, courts of law may order employers to garnish (withhold money from) an employee’s salary or wages for purposes such as paying child support or repaying debts. Amounts withheld from employees for federal income taxes are reported on the employer’s balance sheet as a current liability. When the employer remits the amounts to the federal government, the current liability is reduced.

Example of Payroll Journal Entries

Many companies that do not have dedicated personnel for payroll management opt for outsourcing. Based https://businessandgames.com/what-education-do-you-need-to-be-a-business-owner/ on the company’s payroll cycle, they provide the outsourced agency with salary information and other data such as leaves, attendance, reimbursement details, etc., of their employees every month. The outsourced agency calculates dues and is also responsible for complying with statutory compliances. In India, companies have to follow the legal regulations in their payroll management while disbursing salaries to their employees.