How to Accrue Payroll at Month-End

Month-end payroll accrual is a common accounting practice that involves estimating and recording wages, taxes, and benefits employees have earned but not yet been paid for by the end of an accounting period. Accruing payroll ensures financial statements accurately reflect expenses in the period they are incurred, providing a complete picture of a company’s financial obligations and performance. This is a necessary step for maintaining compliance with accounting principles and delivering reliable financial reports.

Understanding Payroll Accrual

Payroll accrual is rooted in the matching principle of accounting, which dictates that expenses should be recognized in the same period as the revenues they helped generate. Businesses often have pay periods that do not align with month-ends, meaning employees earn wages in one month but are paid in the next. Accruing these amounts ensures the full cost of labor is recorded in the correct accounting period.

An accrual represents an expense incurred but not yet paid. For payroll, this means recognizing the liability for wages, employer payroll taxes, and benefits for work performed up to the last day of the month, even if the payday falls later. This practice provides an accurate view of a company’s financial health. Without payroll accruals, expenses would appear understated in one month and overstated in the next, distorting financial performance.

Gathering Necessary Information

Before calculating accrued payroll, a business must compile specific data. This includes identifying the last payroll run date and the exact end date of the current accounting period. Businesses also need the start and end dates of any pay period spanning the month-end to ensure only the relevant portion of wages is accrued.

Collecting employee gross wages, or individual hourly rates and hours worked for the unpaid portion of the period, is necessary. Information on employer-paid benefits, such as health insurance premiums, 401(k) matching contributions, or paid time off (PTO) accruals for the unpaid period, must be gathered. Current employer payroll tax rates, including FICA, FUTA, and SUTA taxes, are required to estimate associated liabilities.

Calculating Accrued Payroll

Accrued payroll calculation involves several components. Accrued gross wages are typically determined by prorating total wages for the pay period based on days worked within the current month but not yet paid. For instance, if a pay period ends mid-next month, wages are calculated for days worked from the last payroll run up to the current month’s end. This prorated amount represents the gross wages earned by employees but not yet disbursed.

Accrued employer payroll taxes are calculated on these accrued gross wages. For FICA taxes, the employer’s share is 6.2% for Social Security on wages up to an annual limit ($176,100 in 2025) and 1.45% for Medicare on all wages. FUTA tax is generally 0.6% on the first $7,000 of an employee’s wages, assuming the employer receives the maximum state unemployment tax credit. SUTA tax rates and wage bases vary by state and employer, applied to accrued wages up to the state-specific wage base.

Employer-paid benefits for the accrued period also need to be estimated. This includes employer contributions to health insurance, retirement plans like 401(k) matches, or the value of accrued paid time off for unpaid workdays. These benefit costs are added to accrued gross wages and employer taxes to arrive at the total accrued payroll expense. Each of these calculations ensures that the business accurately captures all labor-related costs for the period.

Recording Month-End Accrual Entries

After calculating all components, accrued payroll figures are recorded in the accounting system through journal entries. The objective is to recognize the expense and corresponding liability on the company’s books by debiting expense accounts and crediting liability accounts.

For wages and employer-paid benefits, an expense account (e.g., Payroll Expense or Wages Expense) is debited for the total accrued amount, increasing reported expenses. Simultaneously, a liability account (e.g., Accrued Payroll Payable or Wages Payable) is credited for the same amount, acknowledging the company’s obligation to pay these amounts.

Employer payroll taxes are recorded similarly. An account like Payroll Tax Expense is debited for the total accrued FICA, FUTA, and SUTA taxes. Correspondingly, liability accounts such as Accrued Payroll Taxes Payable are credited, ensuring both the expense and future payment obligation are reflected in financial statements.

Managing Reversing Entries

Reversing entries simplify accounting in the period following an accrual. Made at the beginning of the new accounting period, typically on the first day of the month, their purpose is to reverse the previous month’s accrual entry. This helps prevent double-counting expenses when actual payroll is processed and paid.

When the regular payroll is processed in the new month, it includes wages and related expenses already accrued in the prior month. If a reversing entry is not made, expenses would be recorded again when actual payment occurs, leading to an overstatement. By reversing the accrual, the balance in the accrued liability account becomes zero, and the expense account is effectively cleared before new payroll is recorded.

To create a reversing entry, the original accrual journal entry is simply flipped. For instance, if Accrued Payroll Payable was credited and Payroll Expense debited in the prior month’s accrual, the reversing entry would debit Accrued Payroll Payable and credit Payroll Expense. This zeroes out the temporary liability and expense balances, preparing the accounts for the new period’s transactions.