One of the core concepts of accrual accounting is to recognize expenses in the period that the expense is incurred.
If you reach the end of an accounting period and you are in the middle of a payroll cycle, you should accrue the payroll that you owe for that period as well as the corresponding employer tax liability.
Understanding the proper way to calculate these payroll accruals can ensure that your monthly reporting and ledger are accurate.
Calculate the total number of hours that each hourly-rate employee has worked since the last payroll cycle. Multiply the total outstanding hours for each employee by that employee's hourly rate.
For example, if you have three employees, each worked 25 hours after the last payroll cycle, and earn $8.25, $14 and $16, the total salaries equal $206.25, $350 and $400 for outstanding gross payroll.
Determine the sum of the gross payroll amounts. To calculate this, add each of the gross payroll amounts together; in this example, the total payroll accrual for hourly staff equals $956.25.
Calculate the outstanding payroll for salaried employees. Determine a salary employee's daily rate by dividing the weekly salary by the number of working days. Multiply the daily rate by the number of days of payroll outstanding.
For example, a salary employee who earns $32,000 per year receives $615.38 per week or $123.07 per day for a five-day work week. Seven working days of outstanding salary payroll at this rate equals $861.54.
Add the salary and hourly amounts to determine the total salary accrual. In this example, the total would be $956.25 + 861.54, or $1,817.79.
Create a journal entry to record the accrual. Credit the payroll accrual account for $1,817.79, and debit the payroll account for the same amount to reflect the expense.
Calculate the total employer tax liability based on the accrued salary amount. The percentages for employer tax liability change annually, so confirm the current year's rate with the Internal Revenue Service. If any of the employees are still earning toward the first $7,000 of the year, calculate 6 percent liability for federal unemployment tax on those earnings.
For example, if $674 of the accrual is for employees who have not yet earned $7,000 in the current year, the federal unemployment liability equals $40.44.
Determine the Social Security employer contribution. As of 2019, employers must pay 6.2 percent of the first $132,900 each employee earns. In this example, if all payroll is eligible for this tax, the employer liability equals $112.70.
Calculate the employer's Medicare contribution. In 2019, the employer percentage for Medicare contribution equals 1.45 percent of all wages. In this example, the employer liability is $26.36.
Create the journal entry for the employer tax liability accrual. Credit the tax liability accrual account for the total tax liability for the period. In this case, the tax liability amount equals $179.50. Debit the tax liability expense accounts for each tax.
Verify that the credit and debit columns of the journal entry match to avoid an unbalanced ledger.