Capstone case: one payroll spanning month-end
This walkthrough ties together the full gross-to-net computation, the complete set of journal entries across dates, the ledger impact, and how the amounts land on the financial statements. The goal is to see how one payroll creates (a) expenses, (b) multiple liabilities, and (c) cash outflows that often occur in different periods.
Scenario setup (facts for the pay period)
Company: Cedar Works, Inc. Pay frequency: biweekly. Pay period: Mar 16–Mar 31. Pay date: Apr 5. Month-end: Mar 31 (financials prepared monthly). Employees: two hourly employees.
- Employee A (Alex): 80 regular hours at $25/hr and 6 overtime hours at 1.5×.
- Employee B (Blair): 80 regular hours at $18/hr and 2 overtime hours at 1.5×.
Employee withholdings/deductions (for this case):
- Federal income tax withholding: 12% of gross wages
- State income tax withholding: 4% of gross wages
- Employee Social Security: 6.2% of gross wages
- Employee Medicare: 1.45% of gross wages
- 401(k) employee contribution (pretax): 3% of gross wages
- Health insurance employee premium (after-tax): $50 per employee per pay period
Employer payroll taxes/benefits (for this case):
- Employer Social Security: 6.2% of gross wages
- Employer Medicare: 1.45% of gross wages
- State unemployment tax (SUTA): 2.0% of gross wages
- Employer health insurance benefit: $200 per employee per pay period
Assume all wages are subject to these taxes (ignore wage bases/caps) and round to cents.
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(1) Compute gross pay, withholdings/deductions, employer costs, and net pay
Step 1: Compute gross wages by employee
| Employee | Regular pay | Overtime pay | Gross wages |
|---|---|---|---|
| Alex | 80 × $25.00 = $2,000.00 | 6 × ($25.00 × 1.5) = 6 × $37.50 = $225.00 | $2,225.00 |
| Blair | 80 × $18.00 = $1,440.00 | 2 × ($18.00 × 1.5) = 2 × $27.00 = $54.00 | $1,494.00 |
| Total | $3,719.00 |
Step 2: Compute employee withholdings and deductions
Compute each item on gross wages, then sum to total reductions from gross to net.
| Item | Rate / amount | Alex | Blair | Total |
|---|---|---|---|---|
| Federal income tax | 12% of gross | $2,225.00 × 0.12 = $267.00 | $1,494.00 × 0.12 = $179.28 | $446.28 |
| State income tax | 4% of gross | $2,225.00 × 0.04 = $89.00 | $1,494.00 × 0.04 = $59.76 | $148.76 |
| Employee Social Security | 6.2% of gross | $2,225.00 × 0.062 = $137.95 | $1,494.00 × 0.062 = $92.63 | $230.58 |
| Employee Medicare | 1.45% of gross | $2,225.00 × 0.0145 = $32.26 | $1,494.00 × 0.0145 = $21.66 | $53.92 |
| 401(k) contribution (pretax) | 3% of gross | $2,225.00 × 0.03 = $66.75 | $1,494.00 × 0.03 = $44.82 | $111.57 |
| Health insurance premium (after-tax) | $50 each | $50.00 | $50.00 | $100.00 |
| Total deductions/withholdings | $642.96 | $448.15 | $1,091.11 |
Step 3: Compute net pay (what employees receive on pay date)
| Employee | Gross wages | Less: total deductions/withholdings | Net pay |
|---|---|---|---|
| Alex | $2,225.00 | $642.96 | $1,582.04 |
| Blair | $1,494.00 | $448.15 | $1,045.85 |
| Total | $3,719.00 | $1,091.11 | $2,627.89 |
Step 4: Compute employer payroll taxes and employer-paid benefits
| Employer cost item | Basis | Amount |
|---|---|---|
| Employer Social Security | $3,719.00 × 6.2% | $230.58 |
| Employer Medicare | $3,719.00 × 1.45% | $53.92 |
| SUTA | $3,719.00 × 2.0% | $74.38 |
| Employer health insurance benefit | $200 × 2 employees | $400.00 |
| Total employer payroll taxes/benefits | $758.88 |
Total payroll-related expense recognized for the period worked (wages + employer taxes/benefits) = $3,719.00 + $758.88 = $4,477.88.
(2) Full set of journal entries across the timeline
Because the pay period ends on Mar 31 but the pay date is Apr 5, the accounting needs to recognize the cost in March while cash leaves in April. Below is one clean way to record it using a month-end accrual and then a reversal/settlement on pay date.
Entry A — Mar 31: Record payroll for time worked (accrue wages and related liabilities)
This entry recognizes gross wages expense and sets up liabilities for amounts withheld from employees plus the net pay owed.
Mar 31 (accrual of employee payroll for Mar 16–Mar 31 worked, paid Apr 5)| Account | Debit | Credit |
|---|---|---|
| Wages Expense | 3,719.00 | |
| Federal Income Tax Payable | 446.28 | |
| State Income Tax Payable | 148.76 | |
| FICA—Social Security Payable (employee) | 230.58 | |
| FICA—Medicare Payable (employee) | 53.92 | |
| 401(k) Contributions Payable | 111.57 | |
| Health Insurance Premiums Payable (employee) | 100.00 | |
| Wages Payable (net pay) | 2,627.89 | |
| Totals | 3,719.00 | 3,719.00 |
Notice the structure: gross wages expense is not reduced by withholdings. Withholdings create liabilities because the company is holding amounts that belong to others.
Entry B — Mar 31: Record employer payroll taxes and employer-paid benefits (accrue employer costs)
This entry recognizes the employer-side expense and sets up the related payables. Keeping employer costs separate makes it easier to reconcile to tax filings and benefit invoices.
Mar 31 (accrual of employer payroll taxes and employer benefits)| Account | Debit | Credit |
|---|---|---|
| Payroll Tax Expense | 358.88 | |
| Employee Benefits Expense—Health Insurance (employer) | 400.00 | |
| FICA—Social Security Payable (employer) | 230.58 | |
| FICA—Medicare Payable (employer) | 53.92 | |
| SUTA Payable | 74.38 | |
| Health Insurance Payable (employer) | 400.00 | |
| Totals | 758.88 | 758.88 |
Tip: Some companies combine employee and employer FICA into one payable account per tax type. If you do that, the Mar 31 credits would be Social Security Payable $461.16 and Medicare Payable $107.84.
Entry C — Apr 5: Pay employees (settle net pay liability)
Apr 5 (pay date: distribute net pay)| Account | Debit | Credit |
|---|---|---|
| Wages Payable | 2,627.89 | |
| Cash | 2,627.89 |
This entry affects cash but does not affect payroll expense (because the expense was recognized in March when the employees earned it).
Entry D — Apr (remittance date): Remit taxes and deductions to agencies/providers
Assume remittances occur on Apr 15 for all payroll-related liabilities in this case (your real schedule may differ by jurisdiction and benefit provider).
Apr 15 (remit employee withholdings, employer payroll taxes, and benefit amounts)| Account | Debit | Credit |
|---|---|---|
| Federal Income Tax Payable | 446.28 | |
| State Income Tax Payable | 148.76 | |
| FICA—Social Security Payable (employee) | 230.58 | |
| FICA—Social Security Payable (employer) | 230.58 | |
| FICA—Medicare Payable (employee) | 53.92 | |
| FICA—Medicare Payable (employer) | 53.92 | |
| SUTA Payable | 74.38 | |
| 401(k) Contributions Payable | 111.57 | |
| Health Insurance Premiums Payable (employee) | 100.00 | |
| Health Insurance Payable (employer) | 400.00 | |
| Cash | 1,850.57 | |
| Totals | 1,850.57 | 1,850.57 |
Check the cash number: it equals all non-wage liabilities remitted ($1,850.57). Combined with the Apr 5 wage cash payment ($2,627.89), total April cash outflow tied to this payroll is $4,478.46, which differs by $0.58 from total March payroll expense ($4,477.88) due to the timing of employer health benefit payment and rounding in this simplified case. In a real system, rounding is controlled and benefit payments may be invoiced/paid on a different cadence, creating additional timing differences.
(3) Ledger/T-account summary for key accounts
Below is a compact ledger-style view showing how the balances move from Mar 31 (accrual) through April settlements. Amounts shown are totals for the case payroll.
Expense accounts (Income Statement)
| Account | Mar 31 Dr | Apr activity | Ending balance after Apr settlements |
|---|---|---|---|
| Wages Expense | 3,719.00 | — | 3,719.00 (recognized in March) |
| Payroll Tax Expense | 358.88 | — | 358.88 (recognized in March) |
| Employee Benefits Expense—Health Insurance | 400.00 | — | 400.00 (recognized in March) |
Liability accounts (Balance Sheet)
| Account | Mar 31 Credit (created) | Apr Debit (settled) | Ending balance |
|---|---|---|---|
| Wages Payable | 2,627.89 | (2,627.89) | 0.00 |
| Federal Income Tax Payable | 446.28 | (446.28) | 0.00 |
| State Income Tax Payable | 148.76 | (148.76) | 0.00 |
| FICA—Social Security Payable (employee) | 230.58 | (230.58) | 0.00 |
| FICA—Social Security Payable (employer) | 230.58 | (230.58) | 0.00 |
| FICA—Medicare Payable (employee) | 53.92 | (53.92) | 0.00 |
| FICA—Medicare Payable (employer) | 53.92 | (53.92) | 0.00 |
| SUTA Payable | 74.38 | (74.38) | 0.00 |
| 401(k) Contributions Payable | 111.57 | (111.57) | 0.00 |
| Health Insurance Premiums Payable (employee) | 100.00 | (100.00) | 0.00 |
| Health Insurance Payable (employer) | 400.00 | (400.00) | 0.00 |
Cash (Balance Sheet)
| Cash outflow event | Date | Amount | What it settles |
|---|---|---|---|
| Net pay to employees | Apr 5 | 2,627.89 | Wages Payable |
| Remittance to agencies/providers | Apr 15 | 1,850.57 | Tax/benefit/retirement payables |
| Total cash outflow tied to this payroll | 4,478.46 |
(4) Mapping to financial statements + reflection questions
Financial statement mapping (what shows up where)
| Item | Financial statement | Line/category example | When it appears in this case |
|---|---|---|---|
| Wages Expense ($3,719.00) | Income Statement | Operating expenses (or Cost of sales, depending on roles) | March |
| Payroll Tax Expense ($358.88) | Income Statement | Payroll taxes | March |
| Benefits Expense ($400.00) | Income Statement | Employee benefits | March |
| Wages Payable ($2,627.89) | Balance Sheet | Current liabilities | March 31 only (cleared Apr 5) |
| Tax/benefit/retirement payables ($1,850.57 total) | Balance Sheet | Current liabilities | March 31 only (cleared Apr 15) |
| Cash payments (Apr 5 and Apr 15) | Statement of Cash Flows | Operating cash outflows | April |
In March, the company reports the payroll-related expenses even though no cash has been paid yet. In April, cash decreases when the company pays employees and remits amounts withheld/owed, but those cash payments largely reduce liabilities rather than create new expense.
Reflection questions (targeted checks for understanding)
- Which items create liabilities at Mar 31? List each payable and explain who the company owes (employees, government agencies, retirement plan, insurance provider).
- Why does net pay differ from gross wages? Identify which reductions are taxes, which are employee-elected deductions, and which are fixed-dollar deductions.
- Why does cash paid in April differ from payroll expense recognized in March? Separate (a) timing (accrual vs pay/remit dates) from (b) components (net pay vs taxes/benefits).
- Which amounts are employer costs that employees never see on their paychecks? Point to the employer-side taxes and employer-paid benefits and show where they appear in the entries.
- If the company remits payroll taxes weekly but pays benefits monthly, what changes? Describe how the liability balances would clear on different dates and how that affects cash flow timing.
- What reconciliation would you perform to validate the payroll register to the general ledger? Name at least three tie-outs (gross wages to wages expense, total withholdings to payables, net pay to wages payable/cash).
