Payroll accounting is the part of bookkeeping that records what your payroll costs and what you still owe after each pay run. Your payroll provider calculates pay and taxes, but your books still need the right entries. When payroll is recorded only as the net amount leaving the bank, wages, taxes and liabilities are all wrong.
Key takeaways
- Record each pay run from the payroll register, not from the bank withdrawal.
- Split gross wages, employer taxes, employee withholdings and benefit deductions into the right accounts.
- Liabilities for withheld taxes and deductions should clear to zero when they are paid.
- Reconcile payroll expense and liabilities to the provider's reports every month.
- Payroll processing and tax filings stay with your payroll provider; the bookkeeper records the results.
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What is payroll accounting?
It is recording payroll in your general ledger. Each pay run creates expenses, such as gross wages and employer taxes, and liabilities, such as taxes withheld from employees that you still have to pay over. Payroll accounting puts each amount in the right account and checks that the balances make sense.
How a pay run is recorded
A typical journal entry from the payroll register includes:
- Gross wages, as an expense, often split by department.
- Employer payroll taxes, as an expense.
- Employee tax withholdings, as a liability until paid.
- Benefit and retirement deductions, as liabilities until paid to the provider.
- Net pay, as the amount paid to employees from the bank.
When the payroll provider pays the taxes, the liability accounts are reduced. If a liability account keeps growing, something is being recorded on one side only.
Monthly payroll checks
- Agree total gross wages for the month with the payroll provider's summary.
- Check that each payroll liability account balances to what is still due.
- Match bank withdrawals to net pay and tax payments.
- Record accrued wages at month end if a pay period spans two months.
- Review benefit deductions against provider invoices.
Ask us to review your payroll accounts
Where outsourced bookkeepers fit
Your payroll provider runs payroll and files payroll taxes. The bookkeeper records each pay run, reconciles the accounts and flags differences for you or your provider to resolve. This split fits the controls described in internal controls when you outsource accounting. At year end, payroll totals are part of preparing your books for your CPA. Our bookkeeping service includes payroll entries.
Setting up payroll accounts
A clear set of accounts makes payroll easy to reconcile. A common setup includes:
- Expense accounts for gross wages, employer payroll taxes and employer benefit contributions, split by department if you report that way.
- Liability accounts for federal and state tax withholdings, employer taxes payable, retirement contributions withheld and benefit deductions withheld.
- A clearing account, if your payroll provider debits the bank in several pieces.
- An accrued wages account for month-end accruals.
Keep each liability in its own account. When everything is grouped into one "payroll liabilities" account, it is very hard to see which payment is missing.
Common payroll accounting errors
- Recording the net pay withdrawal as wage expense.
- Posting tax payments to an expense account instead of the liability, so expenses are counted twice.
- Missing employer benefit contributions that are billed separately by the provider.
- Not accruing wages when a pay period crosses month end.
- Treating contractor payments as payroll, or the other way round.
Each of these shows up in a monthly reconciliation of payroll accounts to the provider's reports.
Frequently asked questions
Why doesn't my payroll expense match my bank withdrawals?
The bank shows only net pay and tax payments, while payroll expense includes gross wages and employer taxes. Record each run from the payroll register so the full cost appears in your books.
Should payroll liabilities ever have a balance?
Yes, between the pay date and the date taxes and deductions are paid. Old balances that never clear usually mean a payment or an entry is missing.
Does my bookkeeper run payroll?
In most setups, no. A payroll provider calculates pay and files payroll taxes, and the bookkeeper records and reconciles the results.
What is accrued payroll?
It is wages earned by employees in one month but paid in the next. Recording it at month end puts the cost in the month the work was done.
Keep payroll accurate with Oakridge Global
Our bookkeepers record and reconcile payroll from your provider's reports each month. Schedule a consultation with Oakridge Global to tidy up your payroll accounts.