What is accrued payroll? How to calculate it

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 way that a business can track its expenses over time to help plan ahead, better understand its liabilities, and forecast financial planning into the future.

According to the QuickBooks Entrepreneurship in 2025 report, 44% of business owners are looking to expand their team in 2025. That means it's more important now than ever to understand payroll expenses and how accrued payroll works.

In this post, we’ll walk you through the basics of payroll accrual. Learn what it means for your business, how to calculate it, and a few tips to help you manage your payroll responsibilities.

Why is accrued payroll important?

Understanding accrued payroll is vital for businesses of all sizes. It provides a clearer picture of your financial standing than simply tracking cash flow, allowing for better decision-making and planning. 

Here's how accrued payroll benefits your business:

• Accrued payroll gives a more complete view of a company's financial performance by including all employee compensation expenses, regardless of when cash is paid.
• Businesses can better anticipate future cash outflows related to payroll and manage their budgets effectively.
• Accrued payroll helps businesses make more strategic decisions about staffing, compensation, and benefits.
• It ensures that businesses meet regulatory obligations for payroll tax purposes and financial reporting.
• Accrued payroll provides a more transparent view of the company's financial position related to employee compensation for investors, lenders, and other stakeholders.

Because accrued payroll recognizes employee compensation expenses as they are earned, it provides a more accurate and comprehensive view of a company's financial performance, which leads to better-informed business decisions.

How accrual payroll works

Accrued payroll is how a business accounts for employee wages and related expenses. Instead of waiting until payday to record these costs, businesses track them as employees earn them.

Here's how it works:

1. Work: Employees perform their jobs during a pay period.
2. Expenses add up: As employees work, their pay and any related expenses are tracked. This includes gross wages, employer taxes, and benefits.
3. Company owes money: The company records what it owes to employees and for taxes as a liability on its balance sheet.
4. Payday: When employees get paid, the liability decreases, and the expenses are officially recorded as expenses on the income statement.

This way, businesses always have an accurate view of their current financial obligations and can make better decisions about budgeting and finances.

Curious to find out more? Read more about accrual accounting on our blog. Or, if you’re new to managing employees, read up on how to do payroll.

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.

Remember to record gross wages in this category. Gross pay is the amount that employees are paid before income tax withholdings.

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

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.

Bonuses

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, 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.

Any bonuses, cash prizes, or commissions that were awarded to employees immediately won't 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 you contribute to your employee’s health insurance premiums. Usually, this amount is split between an employer and an employee, so account for only your portion of this cost. In addition, if you include a retirement contribution matching program for employees’ 401(k) accounts, then also include your contribution amount during this step in the calculation.

Some employee benefits, like certain cafeteria plans or flexible spending accounts, may have pre-tax deductions. These deductions reduce the employee's taxable income, affecting the calculation of FICA taxes. Make sure your payroll calculations reflect these deductions to ensure compliance and avoid tax discrepancies.

4. PTO

Lastly, 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, works 40 hours a week, and gets paid once every two weeks. During this pay period, he earned a $200 commission. His payroll accrual will look like this:

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., small businesses can 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.

Common accrued payroll mistakes

Accrued payroll can be tricky, especially when you have many employees with different pay and benefits. It's important to be careful and avoid these common errors:

• Overtime errors: Overtime rules can be confusing, so calculate overtime hours correctly and use the right overtime pay rate.
• Missing employer taxes: Don't forget that accrued payroll includes the employer's portion of payroll taxes, like Social Security, Medicare, and unemployment taxes. If you miss these, you'll underestimate your payroll expenses.
• Benefit omissions: Include the cost of benefits like health insurance, retirement contributions, and paid time off in your calculations.
• Inconsistent records: Be consistent in how you record accrued payroll. Use the same accounting method (accrual or cash) every time, and enter all payroll data accurately and promptly.
• Manual calculation errors: Manual calculations can lead to mistakes. Use payroll software or spreadsheets to automate calculations and reduce errors.
• Lack of review: Review your accrued payroll calculations regularly to catch any mistakes. This is especially important at the end of an accounting period.

When you avoid these mistakes, your accrued payroll will be accurate, and you'll have a clearer understanding of your company's finances.

Streamline your payroll processes

Accurately calculating and managing accrued payroll is essential for maintaining a clear financial picture of your business. By staying on top of accrued payroll, you can better manage your budget, make informed decisions, and ensure compliance with tax regulations.

QuickBooks Payroll makes managing payroll accounting easier for small business owners and larger organizations. Sign up today to see how you can get started managing employee payroll for your enterprise with much more efficiency.