Payroll Journal Entry

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Payroll is an essential part of accounting for any business, as it involves recording employee compensation, taxes, and other related expenses. A payroll journal entry includes wages, taxes, and benefits.

Initial Payroll Journal Entry

Let’s consider a scenario where your business has been paid $20,000 in gross wages for the period ending July 31, 2024. The following deductions are made from employees’ gross pay:

  • Federal Income Tax: $3,000
  • State Income Tax: $1,000
  • Social Security Tax: $1,240
  • Medicare Tax: $290
  • Health Insurance Premiums: $500

Journal Entry (July 31, 2024):

DateAccount TitleDebit ($)Credit ($)
07-31-2024Wages Expense20,000
07-31-2024To Federal Income Tax Payable3,000
07-31-2024To State Income Tax Payable1,000
07-31-2024To Social Security Tax Payable1,240
07-31-2024To Medicare Tax Payable290
07-31-2024To Health Insurance Payable500
07-31-2024To Cash (Net Payroll)13,970

Explanation:

  • Wages Expense will debited for reflecting the total payroll cost for the period.
  • The various tax and benefit payables are credited and record the liabilities for deductions from employees’ wages.
  • Cash (Net Payroll) will credited for recording the actual cash paid to employees after all deductions.

Employer Payroll Tax Expenses

Employers are also responsible for their share of payroll taxes, including Social Security, Medicare, and unemployment taxes.

Let’s assume the following employer payroll taxes:

  • Social Security Tax: $1,240
  • Medicare Tax: $290
  • Federal Unemployment Tax (FUTA): $200
  • State Unemployment Tax (SUTA): $300

Journal Entry (July 31, 2024):

DateAccount TitleDebit ($)Credit ($)
07-31-2024Payroll Tax Expense2,030
07-31-2024To Social Security Tax Payable1,240
07-31-2024To Medicare Tax Payable290
07-31-2024To FUTA Payable200
07-31-2024To SUTA Payable300

Explanation:

  • Payroll Tax Expense will debited to recording the employer’s portion of payroll taxes.
  • The various payroll tax payables are credited and to records the employer’s liability for these taxes.

Payment of Payroll Taxes and Liabilities

When the payroll taxes and other liabilities are paid, another journal entry is made.

Let’s assume your business pays all the payroll liabilities on August 15, 2024.

Journal Entry (August 15, 2024):

DateAccount TitleDebit ($)Credit ($)
08-15-2024Federal Income Tax Payable3,000
08-15-2024State Income Tax Payable1,000
08-15-2024Social Security Tax Payable2,480
08-15-2024Medicare Tax Payable580
08-15-2024Health Insurance Payable500
08-15-2024FUTA Payable200
08-15-2024SUTA Payable300
08-15-2024To Cash8,060

Explanation:

  • Each of the payable accounts is debited to eliminate the liability.
  • Cash will credited for records the outflow of cash for paying these liabilities.

Example Scenarios for Payroll Journal Entries

Example 1: Salary Payment with No Deductions

Your business pays a flat salary of $5,000 to an employee with no deductions on May 31, 2024.

Journal Entry (May 31, 2024):

DateAccount TitleDebit ($)Credit ($)
05-31-2024Salary Expense5,000
05-31-2024To Cash5,000

Example 2: Payment of Bonus

Your business pays a $2,000 bonus to an employee on December 31, 2024, with a 10% federal income tax withholding.

Journal Entry (December 31, 2024):

DateAccount TitleDebit ($)Credit ($)
12-31-2024Bonus Expense2,000
12-31-2024To Federal Income Tax Payable200
12-31-2024To Cash1,800

Example 3: Payment of Employee Benefits

Your business pays $1,200 for employee health insurance premiums for the month of March on March 31, 2024.

Journal Entry (March 31, 2024):

DateAccount TitleDebit ($)Credit ($)
03-31-2024Employee Benefits Expense1,200
03-31-2024To Cash1,200

Example 4: Recording Payroll with Retirement Contributions

Your business has a payroll expense of $10,000 on September 30, 2024, including a 5% contribution to a retirement plan.

Journal Entry (September 30, 2024):

DateAccount TitleDebit ($)Credit ($)
09-30-2024Wages Expense10,000
09-30-2024Retirement Plan Payable500
09-30-2024To Cash9,500

Example 5: Hourly Wages with Overtime

Your business pays $15 per hour to our employee who has worked 160 regular hours and 20 overtime hours which is 1.5 times the regular rate. Gross pay is subject to the following deductions:

  • Federal Income Tax: $350
  • State Income Tax: $150
  • Social Security Tax: $148.80
  • Medicare Tax: $34.80
  • Health Insurance Premiums: $100

Journal Entry (July 31, 2024):

DateAccount TitleDebit ($)Credit ($)
07-31-2024Wages Expense3,450
07-31-2024To Federal Income Tax Payable350
07-31-2024To State Income Tax Payable150
07-31-2024To Social Security Tax Payable148.80
07-31-2024To Medicare Tax Payable34.80
07-31-2024To Health Insurance Payable100
07-31-2024To Cash (Net Payroll)2,666.40

Explanation:

  • Wages Expense will debited for reflect the total gross wages, including overtime.
  • Various tax and benefit payables are credited to record the deductions from the employee’s gross pay.
  • Cash (Net Payroll) will credited to record the net amount paid to the employee after deductions.

Example 6: Salary with Commission

Your business pays base salary of $4,000 and a commission of $1,500 to a salesperson on August 31, 2024. The following deductions apply:

  • Federal Income Tax: $600
  • State Income Tax: $200
  • Social Security Tax: $341.40
  • Medicare Tax: $79.95
  • 401(k) Contribution: $200

Journal Entry (August 31, 2024):

DateAccount TitleDebit ($)Credit ($)
08-31-2024Salary Expense4,000
08-31-2024Commission Expense1,500
08-31-2024To Federal Income Tax Payable600
08-31-2024To State Income Tax Payable200
08-31-2024To Social Security Tax Payable341.40
08-31-2024To Medicare Tax Payable79.95
08-31-2024To 401(k) Payable200
08-31-2024To Cash (Net Payroll)4,078.65

Explanation:

  • Salary Expense and Commission Expense are debited to reflect the employee’s total compensation.
  • The various payables represent the deductions from the employee’s compensation.
  • Cash (Net Payroll) will credited to reflect the net amount paid to the employee.

Example 7: Payroll with Employee Benefits and Taxes

Your business has a payroll of $8,000 for the period ending September 30, 2024. The employer’s share of payroll taxes includes:

  • Social Security Tax: $496
  • Medicare Tax: $116
  • Federal Unemployment Tax (FUTA): $48
  • State Unemployment Tax (SUTA): $64

Additionally, the company pays $600 for employee health insurance and $200 for retirement contributions.

Journal Entry (September 30, 2024):

DateAccount TitleDebit ($)Credit ($)
09-30-2024Wages Expense8,000
09-30-2024Payroll Tax Expense724
09-30-2024Employee Benefits Expense800
09-30-2024To Social Security Tax Payable496
09-30-2024To Medicare Tax Payable116
09-30-2024To FUTA Payable48
09-30-2024To SUTA Payable64
09-30-2024To Health Insurance Payable600
09-30-2024To Retirement Plan Payable200
09-30-2024To Cash (Net Payroll)8,000

Explanation:

  • Wages Expense, Payroll Tax Expense, and Employee Benefits Expense are debited to reflect the total compensation, taxes, and benefits.
  • The various payables represent the liabilities for taxes and benefits.
  • Cash (Net Payroll) will credited to reflect the actual cash paid to employees.

Example 8: Employee Reimbursement for Business Expenses

An employee is reimbursed $1,200 for travel expenses which is a business-related on October 15, 2024. The reimbursement is paid along with the regular payroll, which totals $4,500.

Journal Entry (October 15, 2024):

DateAccount TitleDebit ($)Credit ($)
10-15-2024Wages Expense4,500
10-15-2024Travel Expense1,200
10-15-2024To Cash5,700

Explanation:

  • Wages Expense will debited for the employee’s regular payroll.
  • Travel Expense will debited to account for the reimbursement.
  • Cash will credited for the total payment made to the employee.

Conclusion

Payroll journal entries are crucial for accurately tracking employee compensation and related taxes and benefits. By properly recording these entries, businesses should maintain clear financial records and ensure compliance with tax obligations.

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