Payroll Liability

Payroll is a type of liability that indebts you to pay your employees. As you probably know already from career experience, your employer must be highly accountable for the compensation of its employees and likely had an accountant or accounting department to keep track of payroll. As an employer, you will be responsible for (or liable for) not only paying your employees, but keeping payroll transaction documented in detail for tax and accounting purposes yourself.

A basic overview of the process and types of payroll in terms of accounting transactions:

Payroll is Employee Compensation

• Payroll deductions
• Employee income tax (Determined from State and Federal Tax Withholding Tables)
• Federal Insurance Contributions Act (FICA) Social Security, (Check with your accountant to determine current rate.)

Entries

• To record Salary Expense
• DEBIT – Salary Expense (gross)
  CREDIT – Employee Income Tax Payable (amounts withheld)
  CREDIT - FICA Tax Payable (8%)
  CREDIT – Employee Union Dues Payable
  CREDIT – Salary Payable to Employees (net)
• To record employer’s payroll taxes
• DEBIT – Payroll Tax Expense
• CREDIT – FICA Payable
• CREDIT – State Unemployment Tax Payable
• CREDIT – Federal Unemployment Tax Payable
• To record fringe benefits
• DEBIT – Health Insurance Expense
• DEBIT – Life Insurance Expense
• DEBIT – Pension Expense
• CREDIT – Employee Benefits Payable

Payroll Register

Special Payroll Journal

Payroll Bank Account

Special account which contains the exact amount of net pay to employees for the period