Payroll Journal Entries: Recording Wages, Withholdings, and Liabilities

1) Typical payroll-related accounts (what each account represents)

Payroll journal entries translate a payroll register into double-entry bookkeeping. The goal is to (a) recognize wage cost in the period employees earned it, (b) set up liabilities for amounts you owe to employees and third parties, and (c) record the employer-side payroll taxes as additional expense and liabilities.

Income statement (expense) accounts

• Wage Expense (or Salaries & Wages Expense): the employer’s cost for employee labor for the period.
• Payroll Tax Expense: the employer’s cost for employer-paid payroll taxes (and sometimes employer-paid benefits if your chart of accounts groups them here; many companies use separate benefit expense accounts).

Balance sheet accounts (assets, liabilities)

• Cash: decreases when paychecks/ACH are issued and when taxes are remitted.
• Wages Payable: liability used when wages are earned but not yet paid (accrual). If you pay immediately at processing, you may credit Cash instead of Wages Payable.
• Employee tax withholding payables (liabilities): amounts withheld from employees that you must remit, such as Federal Income Tax Withheld Payable, State Income Tax Withheld Payable, and Employee FICA Payable (or separate Social Security Withheld Payable and Medicare Withheld Payable).
• Other deduction payables (liabilities): amounts withheld for third parties, such as Health Insurance Premiums Payable, Retirement Contributions Payable, Garnishments Payable, etc.
• Employer payroll tax payables (liabilities): amounts the employer owes in addition to wages, such as Employer FICA Payable, FUTA Payable, SUTA Payable (names vary by jurisdiction and chart of accounts).

Practical tip: Keep employee-withheld liabilities separate from employer-tax liabilities. They behave differently and are often reconciled to different reports and filings.

2) Core accrual entry at payroll processing (wages + withholdings + net pay)

This entry records the payroll for the period: you recognize wage expense and set up liabilities for the amounts withheld. The “plug” is the amount owed to employees (net pay) either as Cash (if paid immediately) or Wages Payable (if paid later).

Step-by-step logic

• Step 1: Debit Wage Expense for total gross wages for the payroll.
• Step 2: Credit each withholding/deduction payable for the amounts withheld from employees (taxes and other deductions).
• Step 3: Credit Cash for the net pay if you pay employees at the same time you process payroll; otherwise credit Wages Payable and record the cash payment later.

Core entry (paid immediately)

Dr Wage Expense ............................................. Gross wages
    Cr Federal Income Tax Withheld Payable ................... FIT withheld
    Cr State Income Tax Withheld Payable ..................... SIT withheld
    Cr Employee FICA Withheld Payable ........................ Employee SS/Med withheld
    Cr Other Deductions Payable .............................. Benefits/401(k)/garnishments
    Cr Cash .................................................. Net pay

Alternative: accrue wages first, pay later

If payroll is processed at period-end but paid a few days later, split it into two entries:

(A) At payroll processing / period-end accrual
Dr Wage Expense ............................................. Gross wages
    Cr Withholding/Deduction Payables ........................ Total withholdings/deductions
    Cr Wages Payable ......................................... Net pay owed to employees

(B) When employees are paid
Dr Wages Payable ............................................ Net pay
    Cr Cash .................................................. Net pay

3) Employer tax entry (employer-side payroll taxes)

Employer payroll taxes are an additional cost of employing labor. They are not withheld from employees’ gross pay; they are recorded as a separate expense with separate payables.

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Step-by-step logic

• Step 1: Debit Payroll Tax Expense for the employer’s payroll tax amounts for the payroll.
• Step 2: Credit employer payroll tax payable accounts for each tax the employer owes.

Dr Payroll Tax Expense ...................................... Employer payroll taxes
    Cr Employer FICA Payable ................................. Employer SS/Med
    Cr FUTA Payable .......................................... Federal unemployment
    Cr SUTA Payable .......................................... State unemployment

Practical tip: Some systems combine employee and employer FICA into one payable account. That is acceptable if your reconciliations remain clear, but many accountants prefer separate payables for audit trail and easier tie-out to filings.

4) Journal-entry template + completed example (running case)

Journal-entry template (copy/paste)

Employer tax entry template:

Completed example using the running case

Assumptions from the running case payroll register (single pay period):

• Gross wages: $5,000.00
• Employee withholdings/deductions: Federal income tax $600.00, State income tax $200.00, Employee FICA $382.50, Other deductions (benefits/retirement) $150.00
• Net pay: $3,667.50
• Employer payroll taxes: Employer FICA $382.50, FUTA $30.00, SUTA $120.00 (total employer taxes $532.50)

Entry #1: Record wages and employee withholdings (paid immediately)

Line-by-line explanation:

• Wage Expense (Dr $5,000.00): recognizes the full labor cost earned for the period (gross pay), not the net paycheck amount.
• Federal/State Income Tax Withheld Payables (Cr $600.00, Cr $200.00): amounts taken from employees’ pay that the company must remit to tax authorities.
• Employee FICA Withheld Payable (Cr $382.50): employee portion withheld; it is a liability until deposited.
• Other Deductions Payable (Cr $150.00): amounts withheld for third parties (e.g., benefits or retirement provider) that will be paid later.
• Cash (Cr $3,667.50): the net amount actually paid to employees.

Entry #2: Record employer payroll taxes

Line-by-line explanation:

• Payroll Tax Expense (Dr $532.50): recognizes the employer’s additional payroll-related cost for this pay period.
• Employer FICA Payable / FUTA Payable / SUTA Payable (credits): set up liabilities to be remitted according to deposit schedules.