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How to Create Payroll Journal Entries

Updated Jan 05, 2024

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Keeping track of company spending is essential for staying on top of your financial records. One method accountants use is a payroll journal entry.

Payroll journal entries record your workers’ pay alongside overall business expenses. While the process may look different for every company, payroll ledgers can include employee compensation, benefits, taxes and deductions.

Let’s look at the types of payroll journal entries, how to record them and the best payroll software to streamline the process.

What is payroll accounting?

Payroll accounting is the process of tracking all of the money you spend on wages and payroll taxes. It’s integral to ensuring your employees are paid in full and on time, and it keeps you out of hot water with the IRS. Proper payroll accounting also balances your general ledger so you can be more confident in your financial statements’ accuracy.

Editor’s note: Looking for the right online payroll software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What are payroll journal entries? 

Payroll journal entries are the numbers you record in your small business’s general ledger to track employees’ wages. Each payroll journal entry is paired with another entry of an equivalent and opposite amount, as payroll journals heed the double-entry accounting method. In this method, when your company earns money in one account (credit), it loses money in another (debit).

The double-entry accounting method underlying payroll journal entries can be represented with this mathematical equation:

Assets = Liabilities + Equity

This might be a longer version of this equation:

Assets + Gains + Revenues = Liabilities + Equities + Expenses + Losses

Let’s look at a simplified example to understand how this equation factors into journal entries. When paying employees, for instance, you would debit your expense accounts because you lose cash. However, you would also credit your liability accounts. (A liability is any economic burden.) That’s because as your expenses increase, your cash amount decreases.

Did You Know?Did you know

When you pay your employees, you should debit your expense accounts and credit your liability accounts.

Types of payroll journal entries

These are the three main types of payroll journal entries:

1. Initial recording payroll entry

Initial recordings are the most detailed type of payroll entry. Initial recordings display debits for your wages, direct labor expenses and payroll taxes. The equal — and opposite — transactions for the first two of these three categories are liability general ledger account credits.

In many cases, wages and direct labor are the same, but they may differ in some industries. In construction, for example, direct labor often comprises wages paid for open jobs, whereas wages comprise other employees’ pay overhead.

For your payroll taxes debit, you’ll record credits for each type of tax you withhold. Such taxes could include federal and state income taxes, FUTA (federal unemployment tax), SUTA (state unemployment tax) and FICA (Social Security and Medicare).

If you withhold other payroll deductions, such as benefits plan premiums or wage garnishments, you’ll need to record these values in your initial payroll entry. You should then record each individual benefit amount in its own row as a credit.

Your initial recording payroll entry should look like this table:

Date

Account

Debit

Credit

9/10/2023

Wages

$200,000

N/A

9/10/2023

Payroll taxes expense

$70,000

N/A

9/10/2023

Wages payable

N/A

$200,000

9/10/2023

Employee FICA tax payable

N/A

$15,000

9/10/2023

Federal income tax payable

N/A

$24,000

9/10/2023

State income tax payable

N/A

$8,000

9/10/2023

Wage garnishments payable

N/A

$1,000

9/10/2023

Employer FICA tax payable

N/A

$15,000

9/10/2023

FUTA tax payable

N/A

$1,000

9/10/2023

SUTA tax payable

N/A

$6,000

Note that payroll taxes are unique in payroll journaling because you withhold them earlier than you pay them. When you pay each tax, you must debit the individual tax and credit your payroll account with the corresponding amount. After this, the relevant sections of your payroll journal entry will appear similar to this table:

Date

Account

Debit

Credit

9/10/2023

Employee FICA tax payable

$15,000

N/A

9/10/2023

Federal income tax payable

$24,000

N/A

9/10/2023

State income tax payable

$8,000

N/A

9/10/2023

Wage garnishments payable

$1,000

N/A

9/10/2023

Employer FICA tax payable

$15,000

N/A

9/10/2023

FUTA tax payable

$1,000

N/A

9/10/2023

SUTA tax payable

$6,000

N/A

9/10/2023

Payroll account

N/A

$70,000

FYIDid you know

In payroll journaling, you withhold payroll taxes earlier than you file and pay your payroll taxes.

2. Accrued payroll entry

Despite how comprehensive it appears, your initial payroll entry may not cover all of your wages. That’s because, in some cases, you’ll still have wages to pay after an accounting period closes. Therefore, you’ll need to create an accrued payroll entry.

When creating accrued payroll journal entries, group all of your wages in one row and your payroll taxes in another. This type of payroll journaling is simpler than initial recording. However, you must reverse your accrued entries when your next accounting period begins.

An accrued payroll entry may look like this:

Date

Account

Debit

Credit

9/10/2023

Wages

$200,000

N/A

9/10/2023

Accrued wages

N/A

$150,000

9/10/2023

Accrued payroll taxes

N/A

$50,000

3. Manual payroll entry

If you pay wages by check outside of your company’s typical paydays, you’ll need to create manual payroll entries to account for them. However, you might not do so in your payroll account. Often, these atypically timed payments come from your accounts payable. You can still use the same line items described in your accounts payable.

How to record payroll entries

Although the best online payroll software streamlines payroll accounting, you should still know how to complete this task. Understanding the payroll journaling process can help you find discrepancies in your software’s calculations that indicate numbers incorrectly entered into your system. Knowing how the process works will give you more control over your employee payment processes. 

Follow these steps to create payroll entries:

1. Log your wage payments in the appropriate accounts.

Let’s say you pay $200,000 total in wages for the period in question. You’ll need to record this amount as a debit in your wages account and a credit in your payable account. The distinction between these two similarly named accounts is that the latter is a liability and the former is an expense. Because both accounts are on the right-hand side of the assets equation, it’s mathematically correct to credit one and debit the other in equal amounts.

Your payroll journal entry will look similar to this chart:

Date

Account

Debit

Credit

9/10/2023

Wages

$200,000

N/A

9/10/2023

Wages payable

N/A

$200,000

If your company distinguishes between direct labor and wages, you’ll need to break your $200,000 debit into these corresponding rows:

Date

Account

Debit

Credit

9/10/2023

Wages

$150,000

N/A

9/10/2023

Direct labor

$50,000

N/A

9/10/2023

Wages payable

N/A

$200,000

2. Write down your employee payroll deductions.

You also deduct FICA taxes, income taxes, the employees’ portion of benefit premiums and wage garnishments from your workers’ paychecks. You must record these deductions as transactions in your general ledger.

To create payroll journal entries for these deductions, make a row for each type of tax titled “[tax name] payable.” Record each tax amount as a credit. Then, record the sum of these credits as a payroll tax debit.

Your payroll journal entry for these deductions should appear similar to this table:

Date

Account

Debit

Credit

9/10/2023

Payroll taxes

$200,000

N/A

9/10/2023

Employee FICA tax payable

N/A

$60,000

9/10/2023

Federal income tax payable

N/A

$96,000

9/10/2023

State income tax payable

N/A

$32,000

9/10/2023

Wage garnishments payable

N/A

$4,000

9/10/2023

Employee health insurance premiums payable

N/A

$8,000

3. Record your employer payroll deductions.

Employee payroll deductions are only part of the story; you must also pay employer payroll taxes for your small business. These taxes include FUTA, SUTA and the employer’s share of FICA taxes. One way to double-check your math is to confirm that your employee and employer FICA tax amounts are equal.

TipBottom line

To double-check your accounting and find potential errors, verify that your employer and employee FICA taxes are the same.

Record these taxes as credits in your payroll journal under a debit titled “payroll expenses.” Also record credits for the total premiums you pay for each benefit plan, including your mandatory workers’ compensation insurance. Add the dollar value to the leave that your employees take as credits.

The corresponding payroll journal entry will look like this chart:

Date

Account

Debit

Credit

9/10/2023

Payroll expenses

$124,000

N/A

9/10/2023

Employer FICA tax payable

N/A

$60,000

9/10/2023

FUTA tax payable

N/A

$4,000

9/10/2023

SUTA tax payable

N/A

$24,000

9/10/2023

Employer health insurance premiums payable

N/A

$20,000

9/10/2023

Employer workers’ comp insurance premiums payable

N/A

$12,000

9/10/2023

Employer pay for employee leave payable

N/A

$4,000

4. Add cash to your payroll account.

Add cash to your payroll account to cover all of the necessary payroll costs. When you transfer money from your operating cash account to your payroll cash account, you must record a debit in your payroll account and a credit in your operating cash account.

To determine the amount of cash to add, first add the wages debit in step one, the separate wages debit in step two and the payroll expenses debit in step three. Then, subtract the leave credit from step three because you don’t pay cash for leave. The resulting number is how much cash you must add to your payroll account. In this example, you would use this formula:

$200,000 + $200,000 + $124,000 – $4,000 = $520,000

Your payroll journal entry will appear similar to this table:

Date

Account

Debit

Credit

9/10/2023

Payroll account

$520,000

N/A

9/10/2023

Cash account

N/A

$520,000

5. Pay your employees, and record the payments.

When you pay your staff, you must create another payroll journal entry. Since you debited your payroll account to afford your employee payouts, you’ll credit it once you send the payments. To balance this credit, you’ll debit your wages payable account. Your journal entry for the payment will look like this chart:

Date

Account

Debit

Credit

9/10/2023

Wages payable

$520,000

N/A

9/10/2023

Payroll account

N/A

$520,000

6. Pay all of your deductions, and record the payments.

The final step is to pay all of your recorded deductions, except employee leave. These deductions receive debits equal to their credits, and then your payroll account gets a credit equal to the sum of all of these debits. The payroll journal entry looks like this chart:

Date

Account

Debit

Credit

9/10/2023

Employee FICA tax payable

$60,000

N/A

9/10/2023

Federal income tax payable

$96,000

N/A

9/10/2023

State income tax payable

$32,000

N/A

9/10/2023

Wage garnishments payable

$4,000

N/A

9/10/2023

Employee health insurance premiums payable

$8,000

N/A

9/10/2023

Employer FICA tax payable

$60,000

N/A

9/10/2023

FUTA tax payable

$4,000

N/A

9/10/2023

SUTA tax payable

$24,000

N/A

9/10/2023

Employer health insurance premiums payable

$20,000

N/A

9/10/2023

Employer workers’ comp insurance premiums payable

$12,000

N/A

9/10/2023

Payroll account

N/A

$320,000

Creating these tables is tedious and time-consuming. Payroll software can automate the process by giving you a complete ledger or payroll journal in just a few minutes. [Read related article: Don’t Go Broke: The Best Ways to Save When Starting a Business]

The best payroll software for journal entries  

Any process involving many manual calculations is susceptible to human error. Payroll software solves this problem with automated calculations, which frees you up to address other pressing matters for your small business.

At business.com, we researched the best payroll software to find options for small businesses. To do so, we examined several important factors, such as app integrations, HR tools and payment options. 

  • ADP: We chose ADP as the best software because of ADP’s more than 70 years of experience and positive brand reputation. The robust software easily scales to accommodate both large and small businesses. Take advantage of free or discounted employee assistance resources and legal services. Learn more in our review of ADP.
  • OnPay: We picked OnPay for its transparent pricing. The company offers its best features, like HR tools and multistate payroll processing, in an affordable, inclusive plan. OnPay also offers excellent customer service and an easy-to-use interface. Learn more in our review of OnPay.
  • Paychex: We selected Paychex for its flexibility in serving small and large businesses with up to 1,000 employees. Paychex provides an all-in-one employee retention program on higher tiers, including onboarding, training, and enrollment in benefits such as health insurance. Learn more in our review of Paychex.

Julie Thompson contributed to this article. 

Max Freedman
Contributing Writer
Max Freedman is a content writer who has written hundreds of articles about small business strategy and operations, with a focus on finance and HR topics. He's also published articles on payroll, small business funding, and content marketing. In addition to covering these business fundamentals, Max also writes about improving company culture, optimizing business social media pages, and choosing appropriate organizational structures for small businesses.
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