How to Record Salaries Expense and Payroll Liabilities

Recording salaries and associated payroll liabilities is a fundamental aspect of financial management for any business. It involves more than simply paying employees, ensuring a business accurately reflects its financial performance and adheres to compliance requirements. Understanding these expenses is important for maintaining precise financial records and provides a clear picture of the true cost of labor.

Understanding Payroll Components

Payroll encompasses various individual elements that collectively form the total compensation cost and associated obligations for a business. Gross wages represent the total earnings an employee receives before any deductions are taken. This amount forms the basis for calculating both employee withholdings and employer-paid taxes.

From an employee’s gross wages, several amounts are withheld. Federal Income Tax (FITW) and State Income Tax (SITW) are deducted based on the employee’s Form W-4 and state-specific withholding certificates, which account for filing status and allowances. Social Security and Medicare taxes, collectively known as Federal Insurance Contributions Act (FICA) taxes, are also withheld; for 2025, the Social Security tax is 6.2% on wages up to a limit of $176,100, while Medicare tax is 1.45% on all wages, with no wage base limit. Additionally, an employer must withhold an Additional Medicare Tax of 0.9% on wages exceeding $200,000 in a calendar year, without an employer match. Beyond statutory deductions, voluntary deductions such as health insurance premiums, 401(k) contributions, or union dues may also be taken from an employee’s pay, contingent on employee authorization.

In addition to employee withholdings, employers incur their own set of payroll taxes. For FICA taxes, employers must match the employee’s contribution: 6.2% for Social Security up to the wage base and 1.45% for Medicare on all wages. Another employer-specific tax is the Federal Unemployment Tax Act (FUTA) tax, which helps fund state unemployment programs. The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages, though employers can receive a credit of up to 5.4% for timely payment into state unemployment funds, potentially reducing the effective FUTA rate to 0.6%. State Unemployment Tax Act (SUTA) taxes are also solely an employer responsibility, and their rates and wage bases vary by state, contributing to the overall cost of employment.

Recording Initial Payroll Expense

Recording the initial payroll expense involves creating a journal entry that captures the total compensation earned by employees and the immediate liabilities arising from deductions. This entry establishes the full expense incurred by the business for employee services before any amounts are paid out. It is an important step in accurately reflecting the cost of labor on the company’s financial statements.

To illustrate, a journal entry involves debiting “Salaries and Wages Expense” for the total gross payroll amount. This debit increases the expense account, reflecting the full cost of employee compensation for the period. Concurrently, various liability accounts are credited to acknowledge the amounts withheld from employee pay that the employer is obligated to remit to third parties.

For instance, the following accounts are credited:
Federal Income Tax Payable and State Income Tax Payable for income taxes withheld.
FICA Payable – Employee Share for Social Security and Medicare taxes deducted.
Voluntary deductions, such as Health Insurance Premiums Payable or 401(k) Contributions Payable, to their respective liability accounts.
Wages Payable for the net amount payable to employees if accrued before payment, or directly to Cash if paid immediately.

Accounting for Payroll Liabilities and Payments

Beyond the initial recording of employee wages and withholdings, businesses must account for employer-specific payroll taxes and the subsequent payment of all accumulated payroll liabilities. These additional steps ensure all payroll-related expenses are recognized and all obligations to government agencies and other entities are settled. This complete cycle of entries is important for accurate financial reporting.

Employer payroll taxes represent a separate expense from employee wages and must be recorded independently. A journal entry to record these taxes involves debiting “Payroll Tax Expense” for the total amount of the employer’s share of FICA, FUTA, and SUTA taxes. Correspondingly, specific liability accounts are credited, such as “FICA Payable – Employer Share” for Social Security and Medicare taxes, “FUTA Payable” for federal unemployment taxes, and “SUTA Payable” for state unemployment taxes. These entries ensure the business’s full tax obligations related to employment are recognized as an expense.

Once all payroll liabilities, including employee withholdings and employer taxes, have been recorded, they must be paid to the appropriate recipients. These payments involve remitting withheld income taxes and FICA taxes to the IRS, FUTA taxes to the IRS, SUTA taxes to state agencies, and voluntary deductions to third-party providers. Most federal tax deposits, including income tax withholding and FICA taxes reported quarterly on Form 941, are made either monthly or semi-weekly, depending on the business’s tax liability during a lookback period. FUTA taxes, reported annually on Form 940, are deposited quarterly if the liability exceeds $500.

The payment of these liabilities is reflected through journal entries that debit all the previously credited payroll liability accounts, effectively reducing their balances to zero. The following accounts are debited:
Federal Income Tax Payable
State Income Tax Payable
FICA Payable – Employee Share
FICA Payable – Employer Share
FUTA Payable
SUTA Payable
Any other voluntary deduction payables
The offsetting credit is made to “Cash” or “Bank” to reflect the outflow of funds. Adhering to the specific due dates for these payments, such as the 15th of the following month for monthly depositors or specific weekdays for semi-weekly depositors, is important to avoid penalties and ensure compliance with federal and state tax regulations.