What is Payroll Accounting?
Payroll Accounting is the method of accounting for payroll. Payroll is the aggregate expenditure on wages and salaries incurred by a business in an accounting period. It can also refer to a listing of employees giving details of their pay.
Payroll includes the gross pay due to the employee and employer taxes. The gross pay is divided into net pay actually received by the employee and deductions made from the gross pay for employee taxes and other deductions such as pension contributions, healthcare contributions, and union subscriptions.
In payroll accounting it is important to distinguish between employee taxes which are deducted from the employees gross pay and are therefore paid by the employee, and employer taxes which are in addition to the gross pay and paid by the employers.
Both payroll taxes are usually collected by the employer and paid over to the relevant tax authority.
The analysis of payroll is shown below:
| Payroll | |||
| Gross Pay | Employer tax | ||
| Net pay | Employee tax | Deductions | Employer tax |
Payroll Accounting and the Recording of Payroll
Different Countries have their own employer and employee tax situations and the taxes and deductions may have different names, but the basic payroll accounting procedures are the same.
As an example of payroll accounting, if gross pay is 2,000, employee tax is 500, and other deductions are 100, then the net pay due do the employee is 1,400. The payroll accounting journal entries would be as follows:
| Account | Debit | Credit |
|---|---|---|
| Gross Wages | 2,000 | |
| Employee tax control | 500 | |
| Other deductions control | 100 | |
| Net pay control | 1,400 | |
| Total | 2,000 | 2,000 |
The gross wage is the expense charged to the income statement. The control accounts are all balance sheet accounts representing liabilities for the amounts deducted from the payroll. The employee tax control represents the amount due to the tax authority, the net pay control represents the amount due to the employee, and finally, the other deductions control is the amount due to whichever body the deduction was made on behalf of, for example, the pension scheme, healthcare scheme or union.
Employers Tax Journal
In addition the employer tax liability needs to be recorded with the following payroll accounting journal entry:
| Account | Debit | Credit |
|---|---|---|
| Employer tax | 300 | |
| Employer tax control | 300 | |
| Total | 300 | 300 |
The first entry is the expense charged to the income statement, and the second entry is the liability to the tax authorities recorded in the balance sheet control account.
Pay the Employee the Net Pay
When you pay the employees using cash, the entry is to the net wage control account
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,400 | |
| Net pay control | 1,400 | |
| Total | 1,400 | 1,400 |
Any difference on this account should be reconciled by the payroll accounting team, as it means an employee has either been underpaid or overpaid.
Pay the Tax to the Tax Authorities
Next the tax authority is paid and the tax control accounts are cleared using the following payroll tax accounting journal.
| Account | Debit | Credit |
|---|---|---|
| Cash | 800 | |
| Employee tax control | 500 | |
| Employer tax control | 300 | |
| Total | 800 | 800 |
Again the control accounts should net to zero after the payments have been made, and any difference needs to be investigated before completing that periods payroll accounting.
Pay Over the Deductions
Finally, the other deductions are paid to the appropriate body such as for example a pension scheme, healthcare scheme, or union, and the control accounts are cleared using the following payroll deductions accounting journal.
| Account | Debit | Credit |
|---|---|---|
| Cash | 100 | |
| Other deductions control | 100 | |
| Total | 100 | 100 |
In the example above, the other deductions can refer to many types of deduction such as pension contributions, healthcare schemes, union subscriptions. If there is more than one type of deduction, it is best to maintain a control account for each one so that the liability to a particular organization is clearly identified in the balance sheet of the business.