Payroll Basics for Bookkeeping: Recording Wages and Simple Withholdings

What Payroll Bookkeeping Is (and What It Isn’t)

Payroll bookkeeping is the process of recording wages and related amounts in your accounting system so your financial statements show (1) the true cost of labor and (2) the amounts you owe to employees and government agencies. This chapter focuses on a beginner-safe recording approach: you will capture gross pay, simple employee withholdings, employer payroll taxes at a high level, and net pay—without diving into detailed compliance rules or tax rates.

Key idea: payroll creates both expenses and liabilities

• Expenses represent the cost of employing people (wages and employer payroll taxes).
• Liabilities represent amounts you are holding or owe to others (employee withholdings and employer payroll taxes payable) until you remit them.

Core Payroll Terms You’ll Record

Gross pay

Gross pay is the employee’s total earnings for the pay period before any deductions. For hourly employees, it is typically hours worked × hourly rate (plus any overtime, bonuses, etc.). For salaried employees, it is typically the salary amount allocated to the pay period.

Employee withholdings (simple view)

Employee withholdings are amounts deducted from the employee’s gross pay and held by the business to be paid to others. In a simplified bookkeeping setup, you can group these into one or two liability accounts such as:

• Employee Withholdings Payable (a single bucket for deductions withheld from employees)
• or separate buckets like Federal/State Withholding Payable, Employee FICA Payable, etc. (only if you want more detail)

Bookkeeping point: withholdings are not an expense of the business. They reduce what the employee receives and create a liability until you remit them.

Employer payroll taxes (high-level)

Employer payroll taxes are additional costs the employer owes based on payroll (for example, the employer portion of payroll taxes). These are expenses of the business and typically create a separate liability until paid.

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• Expense account example: Employer Payroll Tax Expense
• Liability account example: Employer Payroll Taxes Payable

Net pay

Net pay is what the employee actually receives: gross pay minus employee withholdings (and any other deductions). Net pay is usually paid by direct deposit or check.

Accounts to Set Up (Simple Chart for Payroll)

To keep payroll clean and easy to reconcile, a beginner-friendly set of accounts is:

• Expense: Wages Expense
• Expense: Employer Payroll Tax Expense (optional if you track employer taxes separately)
• Liability: Employee Withholdings Payable
• Liability: Employer Payroll Taxes Payable (optional if you track employer taxes separately)
• Asset: Cash (your bank account)

If you want the simplest possible approach, you can use one combined liability account like Payroll Taxes Payable to hold both employee withholdings and employer payroll taxes. Many businesses prefer separating them for clarity.

Source Document: A Basic Payroll Report

Your payroll entry should be based on a payroll report (from your payroll provider or internal payroll summary). A basic payroll report for one employee and one pay period might look like this:

Notice the structure: gross pay is the starting point, employee withholdings reduce the employee’s check, and employer payroll taxes are an additional employer cost.

Step-by-Step: Recording Payroll for One Pay Period

Step 1: Identify the amounts you need to post

• Gross pay (expense): $1,000
• Employee withholdings (liability): $200
• Net pay (cash paid to employee): $800
• Employer payroll taxes (expense): $100
• Employer payroll taxes payable (liability): $100

Step 2: Record the payroll journal entry (the pay run)

This entry records what the employee earned, what you withheld, and what you paid out as net pay. It also records the employer payroll tax cost (if you track it at the time of payroll).

Debit  Wages Expense                          1,000
Debit  Employer Payroll Tax Expense             100
  Credit Cash                                  800
  Credit Employee Withholdings Payable          200
  Credit Employer Payroll Taxes Payable         100

How to read this:

• Wages Expense increases to show the labor cost for the period.
• Cash decreases for the amount actually paid to the employee (net pay).
• Employee Withholdings Payable increases because you owe that withheld amount to the appropriate agencies/parties.
• Employer Payroll Tax Expense increases to show the employer-side payroll tax cost.
• Employer Payroll Taxes Payable increases because you owe those employer taxes until you remit them.

Alternative: Simplified single-liability approach

If you prefer fewer accounts, you can combine the two payroll liabilities into one:

Debit  Wages Expense                          1,000
Debit  Employer Payroll Tax Expense             100
  Credit Cash                                  800
  Credit Payroll Taxes Payable                  300

This is acceptable for basic bookkeeping as long as you can still match the liability balance to what is actually owed.

Why Separating Payroll Liabilities from Expenses Matters

A common beginner mistake

A frequent error is recording the entire payroll-related outflow as an expense when payments are made. For example, if you later send $300 to a tax agency, that payment is not a new expense if you already recorded the payroll entry correctly. It is the settlement of a liability.

What correct separation gives you

• Accurate profit: expenses reflect the true cost of labor and employer taxes in the period earned.
• Clear “amounts owed”: liabilities show what must still be remitted.
• Easier reconciliation: you can compare liability balances to payroll reports and payment confirmations.

Timing: Recording the Remittance of Withholdings and Employer Taxes

Payroll often happens on one date, while remitting withholdings and employer payroll taxes happens later. Bookkeeping handles this with a second entry when you pay the liabilities.

Step-by-step: record the payment of payroll liabilities

Assume that a week after payday, you remit both the employee withholdings ($200) and employer payroll taxes ($100) in one payment of $300.

Debit  Employee Withholdings Payable           200
Debit  Employer Payroll Taxes Payable          100
  Credit Cash                                  300

This entry reduces the liabilities to reflect that you no longer owe those amounts and reduces cash for the payment made.

If you used one combined liability account

Debit  Payroll Taxes Payable                   300
  Credit Cash                                  300

Practical Checks to Confirm Your Payroll Posting Is Reasonable

• Net pay check: Gross pay − employee withholdings = net pay (in the example: $1,000 − $200 = $800).
• Liability check after payday: After posting payroll but before remittance, your payroll liability accounts should show what you still owe (in the example: $200 + $100 = $300).
• Liability check after remittance: After paying the agencies, the payroll liability accounts should drop by the amount paid (often to zero for that pay period, unless timing spans multiple periods).
• Expense check: Wages expense should match gross wages for the period; employer payroll tax expense should match the employer portion shown on the payroll report.