Payroll Accounting Entries

Payroll liabilities In most business organizations, accounting for payroll is particularly important because (1) payrolls often are the largest expense that a company incurs, (2) both federal and state governments require maintaining detailed payroll records, and (3) companies must file regular payroll reports with state and federal governments and remit amounts withheld or otherwise due. Payroll liabilities include taxes and other amounts withheld from employees’ paychecks and taxes paid by employers.

Employers normally withhold amounts from employees’ paychecks for federal income taxes; state income taxes; FICA (social security) taxes; and other items such as union dues, medical insurance premiums, life insurance premiums, pension plans, and pledges to charities.

Assume that a company had a payroll of $35,000 for the month of April. The company withheld the following amounts from the employees’ pay: federal income taxes $4,100; state income taxes $360; FICA taxes $2,678; and medical insurance premiums $940. This entry records the payroll:

Date Account Debit Credit
April Salaries Expense    35,000.00
      Federal Income Tax Withheld Payable (given)      4,100.00
      State Income Tax Withheld Payable (given)          360.00
     FICA Social Security Taxes Payable ($35,000 x 6.2%)      2,170.00
     FICA Medicare Tax Payable ($35,000 x 1.45%)          507.50
     Employee Medical Insurance Payable (given)          940.00
     Salaries Payable (35,000 – 4100 – 360 – 2170 – 507.50 – 940)    26,922.50
To record the payroll for the month ended April 30.

All accounts credited in the entry are current liabilities and will be reported on the balance sheet if not paid prior to the preparation of financial statements. When these liabilities are paid, the employer debits each one and credits Cash.

Employers normally record payroll taxes at the same time as the payroll to which they relate. Assume the payroll taxes an employer pays for April are FICA taxes,  state unemployment taxes (SUTA) $1,890; and federal unemployment taxes (FUTA).  No employee has earned more than $7,000 in this calendar year.  The entry to record these payroll taxes would be:

Date Account Debit Credit
April Payroll Tax Expense 4,848
FICA Social Security Taxes Payable ($35,000 x 6.2%) 2,170
FICA Medicare Tax Payable ($35,000 x 1.45%) 507.5
FUTA Taxes Payable ($35,000 x 0.8%) 280
SUTA Taxes Payable 1890
To record employer’s payroll taxes.

These amounts are in addition to the amounts withheld from employees’ paychecks. The credit to FICA Taxes Payable is equal to the amount withheld from the employees’ paychecks. The company can credit both its own and the employees’ FICA taxes to the same liability account, since both are payable at the same time to the same agency. When these liabilities are paid, the employer debits each of the liability accounts and credits Cash.