Lesson 36 - Beginner accounting course

36. Introduction to Payroll Accounting

Payroll accounting is a crucial function for businesses, ensuring employees are paid accurately and on time while complying with tax regulations. It involves recording wages, salaries, bonuses, deductions, and employer payroll taxes. Proper payroll accounting helps maintain financial stability and legal compliance.

Key Components of Payroll Accounting

1. Gross Pay – The total earnings of an employee before any deductions, including salaries, hourly wages, overtime, bonuses, and commissions.

2. Deductions – Amounts withheld from an employee’s gross pay, such as income tax, Social Security, health insurance, and retirement contributions.

3. Net Pay – The amount an employee takes home after deductions (also called "take-home pay").

4. Employer Payroll Taxes – Taxes that employers must pay in addition to employee wages, such as Social Security, Medicare, and unemployment taxes.

Payroll Accounting Process

1. Recording Gross Wages

   • Salaried employees receive a fixed amount, while hourly employees are paid based on hours worked. Overtime is calculated separately.

2. Calculating Payroll Deductions

   • Federal and state income tax withholdings, Social Security, and retirement plan contributions are subtracted.

3. Employer Contributions

   • Employers match Social Security and Medicare taxes and contribute to unemployment insurance.

4. Payroll Payments

   • Employees receive payments via direct deposit, checks, or cash, and payroll records are updated.

5. Recording Payroll in Financial Statements

   • Payroll expenses are recorded in the income statement, and liabilities (e.g., taxes owed) appear on the balance sheet.

Example: Payroll Journal Entry

Assume an employee earns a $3,000 salary, with the following deductions:

• Federal income tax: $300

• Social Security (6.2%): $186

• Medicare (1.45%): $43.50

• Health Insurance: $150

The employer also pays matching Social Security and Medicare taxes.

Employer Payroll Taxes: 

Impact on Financial Statements 

Key Takeaways:

• Payroll accounting tracks employee wages, deductions, and employer obligations.

• Proper payroll management ensures compliance with tax laws.

• Payroll costs affect financial statements by increasing expenses and liabilities.

• Errors in payroll accounting can lead to penalties, employee dissatisfaction, and financial misstatements.