As anyone who pays employees knows, payroll costs can accrue quickly. Employers need a way to track expenses, like employee compensation and payroll taxes, so they have a clear picture of their current financial standing at any given time. Accrued payroll helps provide this visibility.
Table of Contents
What is accrued payroll?
Accrued payroll is any payroll-related expense that has not yet been paid. Until the debt is satisfied, accruals are recorded as liabilities in payroll ledgers.
See how simple small business payroll can be.
Compare PackagesTypes of accrued payroll
During a pay period, the following payroll liabilities may accrue:
- Hourly wages
- Salaries
- Commission
- Bonuses
- Federal Insurance Contribution Act (FICA) taxes
- Unemployment taxes
- Other state and local taxes
Why is payroll accrual important?
Payroll accruals are an essential part of cash flow management and reporting. Employers need to know not only how much they’ve paid employees and government agencies, but also how much they still owe. Without this information, employers may spend money earmarked for payroll and risk subjecting themselves to employee wage claims and tax penalties.
How to calculate accrued payroll
- Calculate wages accrued
Multiply the employee’s hourly wage by the total hours worked during a pay period or divide the annual salary by the total number of pay periods in the year. Add any bonuses or commissions received to the result. - Calculate employer payroll taxes due
Employers pay half of the FICA tax total for each employee, as well as federal and state unemployment taxes up to the wage base limits. - Update the payroll journal or ledger
Record the total compensation due to employees and the total taxes owed to government agencies. Mark these as liabilities until paid.
Accrued payroll example
Employer A hires Employee B at $14 an hour. During the first pay period, Employee B works 80 hours. How much FICA tax is accrued during that time?
- $14 x 80 = $1,120 gross pay
- $1,120 x 1.45% = $16.24 Medicare tax
- $1,120 x 6.2% = $69.44 Social Security tax
- $16.24 + $69.44 = $85.68 employee FICA tax liability
Remember that employers pay an equal amount in FICA tax, so the combined accrual for Employee B and Employer A is $171.36.
How to record accrued wages and taxes
Payroll accruals generally can be recorded as either reversing or non-reversing adjusting entries in a journal. With a reverse approach, employers record accrued payroll at the end of a pay period and reverse it at the beginning of the next pay period. If they use non-reversing adjusting entries, employers still record accrued payroll at the end of the pay period. But instead of reversing the accrual, they true up or eliminate it once all payroll dues are paid.
Accrued payroll journal entry
Below is an example of a payroll journal with reversing entries:
End of pay period 1
| Account | Debit | Credit |
|---|---|---|
| Compensation expenses | x | |
| Accrued compensation | x |
Start of pay period 2
| Account | Debit | Credit |
|---|---|---|
| Compensation expenses | x | |
| Accrued compensation | x |
Tips for recording accrual payroll
When recording payroll accruals, it’s important to remember that more payroll taxes are accrued early in the year than later in the year due to wage base limits. For example, once an employee reaches the wage cap for Social Security and federal unemployment, those taxes no longer accrue and should not be documented in the payroll journal for the remainder of the year.
Frequently asked questions about accrued payroll
What is an alternative to accrual accounting?
The alternative to accrual accounting is cash-based accounting, where employers record expenses only when cash payments or transactions occur. Some small businesses prefer this type of accounting because it is simple, though it may not be suitable for a large company that needs a more accurate depiction of its liabilities.
Should you track using accrued payroll?
Under the Generally Accepted Accounting Principles, corporations must use the accrual accounting method. The IRS also requires accrual accounting for certain businesses depending on their annual gross receipts. Small businesses not beholden to GAAP or IRS requirements can generally choose between accrual and cash-based accounting.
Do you need to reverse accrued payroll entries?
Reversing accrued payroll from a previous pay period at the start of the new pay period is an accepted practice. Employers may also record accrued payroll using non-reversing adjusting entries.
Is accrued payroll an expense?
Accrued payroll consists of all the expenses an employer may incur during a payroll cycle, such as employee compensation, payroll taxes, contributions to benefits plans, etc.
What category is accrued payroll?
Accrued payroll is considered a liability until the employer satisfies the payroll debt.
Where does accrued payroll go on the balance sheet?
Accrued payroll is recorded as a credit under the liability section of a balance sheet.
This guide is intended to be used as a starting point in analyzing accrued payroll and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
