How to Record Salary Expense in a Journal Entry

A journal entry is the initial record of a financial transaction, detailing affected accounts and amounts. Accurately recording salary expenses is fundamental for any business, as it directly impacts financial statements. These entries reflect the true cost of labor, ensuring accurate reporting of expenses and liabilities. Proper payroll accounting is also necessary for compliance with federal and state tax regulations.

Understanding the Elements of Payroll for Journal Entries

Payroll involves calculating gross pay (total compensation before deductions) and net pay (amount received after all withholdings). Deductions from an employee’s gross pay represent employer liabilities, as the employer is responsible for remitting these withheld funds to the appropriate government agencies.

Common employee withholdings include federal income tax, deducted based on an employee’s W-4 form and IRS tax tables. State income tax is also withheld in most jurisdictions, with rules varying by location. Social Security and Medicare taxes, known as Federal Insurance Contributions Act (FICA) taxes, are mandatory employee deductions. The employee’s portion for Social Security tax is 6.2% on wages up to an annual limit, and the Medicare tax is 1.45% on all wages, with no wage limit.

Beyond employee withholdings, employers incur their own payroll tax expenses, separate from the wages paid to employees. Employers must match the employee’s Social Security (6.2%) and Medicare (1.45%) contributions. These employer-paid FICA taxes are an additional business expense. Employers also pay Federal Unemployment Tax Act (FUTA) taxes, which generally apply to the first $7,000 of an employee’s wages. The FUTA tax rate is 6.0%, though employers typically receive a credit for state unemployment taxes paid, reducing the effective federal rate to 0.6%.

State Unemployment Tax Act (SUTA) taxes are another employer-specific payroll expense, with rates and wage bases varying by jurisdiction and an employer’s experience rating. Businesses track several key accounts for payroll journal entries. Salaries Expense represents the total gross wages earned by employees during an accounting period. Salaries Payable is a liability account for the amount owed to employees before net pay is disbursed.

Cash is an asset account used for actual payments to employees or tax authorities. Federal Income Tax Payable, State Income Tax Payable, and FICA Payable are liability accounts reflecting amounts withheld from employees or owed by the employer to tax agencies. FUTA Payable and SUTA Payable are also liability accounts for the employer’s unemployment tax obligations. Payroll Tax Expense is an expense account for the employer’s portion of payroll taxes, separate from the salaries expense.

Recording the Salary Expense Accrual

Recording the salary expense accrual involves recognizing the total gross wages earned by employees and amounts withheld from their pay, before any cash is disbursed. This journal entry typically occurs at the end of an accounting period to accurately reflect the expense incurred. The Salaries Expense account is debited for the full gross pay, increasing the expense reported on the income statement, reflecting the total cost of labor.

Corresponding credits increase various liability accounts, representing amounts the employer owes to third parties on behalf of employees. Federal Income Tax Payable is credited for the amount of federal income tax withheld from employee wages, increasing the business’s liability to the IRS. State Income Tax Payable is credited for any state income taxes withheld, increasing the liability to the respective state tax authority.

FICA Payable is credited for the employee’s portion of Social Security and Medicare taxes withheld from their gross pay, increasing the business’s liability for these federal payroll taxes. The remaining gross pay, after all employee withholdings, is credited to Salaries Payable, representing the net amount the business owes directly to its employees.

For example, if gross salaries are $10,000, federal income tax withheld is $1,500, state income tax is $500, and employee FICA is $765 (6.2% for Social Security on $10,000 plus 1.45% for Medicare on $10,000), the journal entry would involve several credits. The Salaries Expense account would be debited for $10,000. Federal Income Tax Payable would be credited for $1,500, State Income Tax Payable for $500, and FICA Payable for $765. The remaining amount, which is the net pay of $7,235 ($10,000 – $1,500 – $500 – $765), would be credited to Salaries Payable.

Recording Employer Payroll Tax Expenses

The employer’s portion of payroll taxes is an additional business expense, distinct from gross wages paid to employees. This expense is recognized in a separate journal entry due to the employer’s legal obligation to contribute to social welfare programs. These taxes, including the employer’s share of FICA, FUTA, and SUTA, are an operating cost that directly impacts profitability.

To record these expenses, the Payroll Tax Expense account is debited, increasing total expenses. Various liability accounts are credited to acknowledge amounts owed to government agencies, ensuring the balance sheet reflects short-term obligations.

The FICA Payable account receives a credit for the employer’s matching portion of Social Security and Medicare taxes (6.2% for Social Security and 1.45% for Medicare). FUTA Payable is credited for the federal unemployment tax obligation, typically 0.6% on the first $7,000 of an employee’s wages. SUTA Payable is credited for the state unemployment tax, which varies based on state-specific rates and wage bases.

For instance, if the employer’s FICA portion is $765 (matching the employee’s $765), FUTA is $42 (0.6% of $7,000), and SUTA is $200 (example rate on a state-specific wage base), the journal entry would involve a single debit and multiple credits. The Payroll Tax Expense account would be debited for the total employer payroll taxes of $1,007 ($765 + $42 + $200). FICA Payable would be credited for $765, FUTA Payable for $42, and SUTA Payable for $200.

Recording Salary and Payroll Tax Payments

The final step in the payroll accounting cycle involves recording cash payments to employees and tax authorities. These payments clear the liability accounts established in previous accrual entries. When employees are paid their net wages, the Salaries Payable account is debited to reduce this liability. The corresponding credit is made to the Cash account, reflecting the outflow of funds. For example, if the net pay owed to employees was $7,235, the Salaries Payable account would be debited for $7,235, and the Cash account would be credited for the same amount.

When payroll taxes are remitted to the government, the respective payable accounts are debited. The FICA Payable account is debited for the combined employee and employer portions of Social Security and Medicare taxes. Federal Income Tax Payable and State Income Tax Payable are also debited, reducing liabilities for withheld income taxes. FUTA Payable and SUTA Payable accounts are debited when federal and state unemployment taxes are paid. The corresponding credit for all these tax payments is made to the Cash account, reflecting the total outflow of funds for payroll taxes. For instance, if the total FICA payable was $1,530 (employee $765 + employer $765), Federal Income Tax Payable was $1,500, State Income Tax Payable was $500, FUTA Payable was $42, and SUTA Payable was $200, the Cash account would be credited for the sum of these amounts, $3,772.