Accrued payroll is the money that a business owes its employees for work performed during a given pay period but has not yet paid out. It is one of the ways that a business can track its expenses over time to help plan ahead, better understand its liabilities, and forecast financial planning into the future.
It’s smart to keep a close eye on the payroll expenses that have accrued over a pay period, even if the checks haven’t gone out yet. That way, no matter when in the month it is, you know where your payroll situation stands, and you won’t be blindsided by unexpected expenses later.
In this post, we’ll walk you through the basics of payroll accrual. Keep reading to learn what it means for your business, how to calculate it, and a few tips to help you manage your payroll responsibilities. Or, you can use the links below to navigate the post.
- What is payroll accrual?
- Types of accrued payroll
- How to calculate accrued payroll
- Accrued payroll example
- Accounting for accrued payroll
- Key takeaways for accrued payroll
What is accrued payroll?
Accrued payroll is the process in which the amount of money a business owes or is owed accumulates over time. For example, you may have heard of accrual accounting, which differs from cash accounting. Payroll accrual refers to the payable funds that accumulate and that a business must pay their workers on payday.
Accrual accounting basics
Accrual accounting allows businesses to record expenses that are still pending the receipt of cash. So, if clients pay with a check or credit card, accrual accounting allows business owners to record the amount as money in. Similarly, if a business expenses something, it can still be accounted for in their expense account even before the money is withdrawn from the account. This differs from cash accounting, which only takes into account money that has actually come in or actually gone out when updating a general ledger.
Types of accrued payroll
Payroll accrual can take into account many different sources of expenses for businesses. This might be employee salaries, health care benefits, payroll taxes, or Social Security. To keep tabs on accrued payroll and gain insight into your business’s finances, keep in mind these sources of payroll accrual.
Salaries and wages
The largest source of accrued payroll is likely to come from salary and wages payable to employees. What are accrued wages? These are wages that are owed for the labor performed by your employees and are accounted as a liability until payday, when they become an expense. However, it’s a good idea to understand the size of your liabilities as a business owner. So, keeping track of accrued salary as part of accrued payroll is critical.
Note: Remember to record gross wages in this category. Gross pay is the amount that employees are paid before income tax withholdings. Net pay is what employees receive after payroll deductions for taxes and retirement contributions (along with any other garnishments) are taken out.
Just getting started? The QuickBooks blog can walk you through how to set up payroll.
Paid time off (PTO)
If your company offers paid time off (PTO) for employees, this should also be accounted for in accrued payroll. That’s because, even if the employee doesn’t take time off that particular month, your business still owes them the value of their PTO. This is especially true in workplaces where employees accrue PTO each month.
It’s also important to mark PTO under accrued payroll in case an employee decides to leave the company. In that case, you will likely owe the employee the value of their PTO in cash as part of their final paycheck.
Payroll taxes are another source of liability for a business. When accounting for payroll expenses, be sure to also record the portion of your payroll budget that must be directed toward:
- Federal taxes
- State income taxes
- State unemployment taxes
- Medicare contribution
- Social Security taxes
- Employee pensions and retirements
- Employer payroll taxes
As the employer, payroll tax expenses and the withholding amounts are your responsibility. It’s essential to account for payroll taxes in order to remain in compliance with the IRS.
If your employees received any bonuses, commission, or other forms of payment in addition to your usual wage expense, it’s smart to record it too.
How to calculate accrued payroll
Curious how to calculate accrued payroll yourself? Follow these steps for each employee who works at your business:
1. Hours worked x hourly wage = outstanding payroll
First, calculate the number of hours a given employee worked. Then, multiply that by their hourly wage. That is the total amount that you owe them for that pay period.
Be sure that you add together only the hours that they’ve worked that they have not been paid for. It’s a good idea to pay your employees on a regular basis. That way, they know when to expect a paycheck, and you know the period to calculate their pay for. Plus, most states have a required pay frequency—make sure you’re familiar with these laws.
2. Factor in bonuses, commission, and overtime
If your employee has earned any extra wages apart from their regular hourly rate, be sure to add that to the total. If you’re not sure how to calculate overtime pay, you can check out our informative guide: How to calculate overtime pay for hourly and salaried employees.
If any bonuses, cash prizes, or commissions were awarded to employees immediately, then these will not be counted in accrued payroll.
3. Payroll taxes (FICA), health insurance, and retirement contributions
The next step is a bit tricky. Be sure to differentiate between employee contributions to Federal Insurance Contributions Act (FICA) taxes and employer contributions to FICA taxes. The latter will be a portion of your accrued payroll; the former was already accounted for in gross pay.
Next, add the amount that you contribute to your employee’s health insurance premiums. Usually, this amount is split between an employer and employee, so be sure to account for only your portion of this cost. In addition, if you include a retirement contribution matching program for employees’ 401(k) accounts, then the amount that you contribute will be included during this step in the calculation too.
Lastly, be sure to add the total amount that you offer your employees in monthly PTO to your accrued payroll costs. Because you are accounting for accrued payroll—rather than payroll that’s been paid out—PTO that hasn’t been used yet still counts. After all, you still owe this to your employee, so it’s still part of the accrued liabilities that your business has on record.
To sum up, you can calculate your payroll accrual using this formula:
(Hourly wage x hours worked) + (bonuses + commissions + overtime) + (payroll taxes + retirement and insurance) + (PTO)
It’s easier to understand payroll accrual with an example.
Accrued payroll example
Let’s assume you have an employee named Pedro. He gets paid $20 an hour and works 40 hours a week, and gets paid once every two weeks. This pay period, he earned a $200 commission. His payroll accrual will look like this:
- Gross pay: $20 x 40 x 2 = $1600
- Commission: $200
- Employer contributions: $200 tax + $100 retirement + $150 insurance
- PTO: $80
- Total: $2,330
Once all the various expenses associated with payroll are accounted for, the total accrued payroll is $2,330.
Once you’ve calculated the accrued payroll for one of your employees, you’ll have to repeat the process for every employee and contractor on your payroll. This will give you the total accrued payroll for your business. With a well-organized system for income statements, taxes, insurance, etc., it is possible for small businesses to stay on track. However, there are other solutions.
Keeping track of payroll entries, credits, and debits for every employee in your organization as well as the many other expenses you face leaves room for error. If something goes wrong, adjusting entries can become a huge chore—you’ll have to dig through potentially hundreds of records. Keeping up with a journal entry for every employee can be challenging, which is why many employers have begun opting for automated payroll management solutions.
How to record accrued payroll and taxes
After calculating your accrued payroll, you must record it within your accounting software. Payroll software integrates with accounting solutions, allowing you to create a report in one, centralized entry. The following should be recorded
- Employee wages and pertinent deductions
- Employer payroll taxes and contributions
- Any PTO accrual
Accrued payroll journal entry
Within QuickBooks, you can prepare a single journal entry to record all salaries. Save the entry, then press “Reverse” to create a reversing entry on the first day of the present month. This will ensure your accrued payroll is reported in the appropriate period.
Key takeaways for accrued payroll
Here’s what to remember about accrued payroll:
- Payroll accrual is the payroll process of adding up the liabilities your business incurs that are related to payroll.
- This includes wages, employer payroll taxes, benefits, etc.
- Accrual accounts for liabilities even if they haven’t been paid out yet.
- To calculate accrued payroll, add together the different sources of liability for each employee. Then, add together all the sums of all the employees for a given pay period.
- Accounting for payroll accrual on your balance sheet can be tricky—but there are tools that can help.
Streamline your payroll processes
QuickBooks Payroll makes managing payroll accounting easier for everyone from small business owners to larger-scale organizations. Sign up today to see how you can get started managing employee payroll for your enterprise with much more efficiency.
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