Payroll journal entries explained, with debits and credits

The accounts a payroll entry uses

A payroll posting touches two groups of accounts:

• Expenses: salaries and wages expense (the gross pay), employer payroll contributions expense (the employer's share of social security, for example FICA in the US or National Insurance in the UK) and employer pension or benefits expense.
• Liabilities: salaries payable (net pay owed to employees), income tax withheld payable, social contributions payable and pension contributions payable. Cash is credited when they are paid.

The amounts withheld from employees are not an extra expense for the company. They are part of the gross pay that the company holds for the tax office and the funds, so they sit in liability accounts until they are paid over.

Step 1: from gross pay to net pay

The numbers come from the payroll register. In the example, gross pay is $24,000. A 5% pre-tax pension contribution ($1,200) lowers taxable pay to $22,800, income tax is withheld at 15% of that ($3,420) and employee social contributions at 7% of gross ($1,680). Net pay is $24,000 − $1,200 − $3,420 − $1,680 = $17,700.

The rates are fictional and simplified, because real withholding depends on the country, the tax tables and each employee's elections. The journal entries that follow work the same way whatever the rates are.

Worked example: May payroll of a small studio

Gross pay and the rates are yellow inputs. The register in rows 2–9 feeds the three journal entries, and row 25 proves that debits equal credits.

Worked example: May payroll of a small studio

	A	B	C
1	Payroll register, May	Rate	Amount
2	Gross salaries and wages		24,000.00
3	Employee pension (pre-tax)	5.0%	1,200.00
4	Taxable pay		22,800.00
5	Income tax withheld	15.0%	3,420.00
6	Employee social contributions	7.0%	1,680.00
7	Net pay		17,700.00
8	Employer social contributions	8.0%	1,920.00
9	Employer pension contributions	4.5%	1,080.00
10
11	Entry 1 (31 May): record the payroll	Debit	Credit
12	Salaries expense	24,000.00
13	Salaries payable (net pay)		17,700.00
14	Income tax withheld payable		3,420.00
15	Social contributions payable		1,680.00
16	Pension contributions payable		1,200.00
17	Entry 2 (31 May): employer contributions	Debit	Credit
18	Employer social contributions expense	1,920.00
19	Employer pension expense	1,080.00
20	Social contributions payable		1,920.00
21	Pension contributions payable		1,080.00
22	Entry 3 (31 May): pay the net salaries	Debit	Credit
23	Salaries payable (net pay)	17,700.00
24	Cash		17,700.00
25	Total of the three entries	44,700.00	44,700.00
26	Total payroll expense (gross + employer)		27,000.00
27	Still owed to the tax office and funds		9,300.00

Fictional, simplified rates for teaching. Real payroll follows local tax and social security rules, and account names differ between charts of accounts.

Entry 1: record gross pay and withholdings

Debit Salaries expense $24,000. Credit Salaries payable $17,700, Income tax withheld payable $3,420, Social contributions payable $1,680 and Pension contributions payable $1,200. Debits and credits are both $24,000.

Many accounting systems post this as one compound entry. In a spreadsheet it is often easier to use one row per credit with the same debit account, as in the example grid. The result in the ledger is identical.

Entry 2: the employer's contributions

On top of gross pay, the employer pays its own share: here 8% social contributions ($1,920) and a 4.5% pension contribution ($1,080). Debit Employer social contributions expense $1,920 and Employer pension expense $1,080, credit the same liability accounts as in Entry 1.

The total payroll expense for the month is therefore gross pay plus employer contributions: $24,000 + $1,920 + $1,080 = $27,000, or 112.5% of gross. That is the number to use for budgets and for the cost of an employee.

Entries 3 and 4: paying net pay and the liabilities

On pay day, debit Salaries payable $17,700 and credit Cash $17,700. Salaries payable is back to zero. What remains open is $9,300: income tax $3,420, social contributions $3,600 (employee $1,680 plus employer $1,920) and pension $2,280 (employee $1,200 plus employer $1,080).

When these are paid by their due dates, debit each liability and credit cash for $9,300 in total. After that, cash paid for May equals the total payroll expense of $27,000, which is a useful check. Reconcile the liability balances with the payroll register and the bank every month, in the same way as a bank reconciliation.

Month-end accruals: wages earned but not yet paid

If employees have worked days that will only be paid in the next pay run, accrue them at month end: debit Salaries expense, credit Accrued wages payable, and reverse the entry when the payroll is run. For example, hourly staff who worked $1,800 after the last pay run need an accrual of $1,800. Earned but untaken holiday is often accrued the same way. Without accruals, expenses land in the month of payment rather than the month the work was done, and the trial balance understates liabilities.

Common mistakes

• Debiting salaries expense with net pay. The expense is the gross pay. Net pay is only what the employees receive.
• Booking withholdings as an expense. Tax and contributions withheld are the employees' money held for others, so they are liabilities.
• Forgetting the employer's share. Employer contributions are a second expense on top of gross pay.
• Mixing employee and employer parts. Both are owed to the same fund, so the liability balance is the sum of the two.
• Recording payroll only when cash leaves. Wages earned in the month belong in that month: accrue them at month end.
• Skipping the reconciliation. Check every month that the payroll register, the liability balances and the bank payments agree.