Accounting for Payroll Liabilities

Businesses depend on their payroll accountants to manage and coordinate the payroll process. Payroll accountants record the expenses associated with company payrolls, the liabilities incurred and payment of those liabilities. Payroll accountants also coordinate the reporting of payroll liabilities on the financial statements with the general ledger accountant.

Standard Payroll Entries

Companies pay their employees based on a predetermined payment schedule. Some companies pay weekly, some biweekly and some monthly. When the payroll accountant records the regular payroll, she accounts for the wages, the payroll deductions and the employer’s payroll taxes. Payroll deductions include FICA tax for Social Security and Medicare, federal income tax and health insurance. The net amount to be paid to employees is recorded as net payroll payable. The employer’s payroll taxes include FICA tax, FUTA tax for federal unemployment and SUTA tax for state unemployment. When the accountant makes the entry, she records a debit entry to wages expense for the full amount of the payroll. She then records a credit entry for FICA tax payable, federal Income tax payable, health insurance payable and any other deductions from the employee’s paycheck. She makes a final credit entry to net payroll payable.The accountant then records the employer’s payroll tax liability. She debits payroll tax expense and credits FICA tax payable, FUTA tax payable and SUTA tax payable. FICA tax payable, federal income tax payable, health insurance payable, net payroll payable, FUTA tax payable and SUTA tax payable are all payroll liability accounts.

Payment of Payroll Liabilities

When the accountant pays the balance in each payroll liability account, he records the payment in the accounting records. He debits each payroll liability account for the balance and credits cash for the total amount.

Payroll Liability Accruals

Sometime the pay period crosses between two accounting periods, such as the end of the month. At the end of the first period, the accountant records the payroll expense and payroll liability for the portion of the payroll attributable to the first period. She takes the percentage of the pay period that applies to the first period and multiplies that amount by the total payroll amount. The payroll deductions and the employer’s payroll taxes are calculated based on the total payroll amount which applies to the first period. The accountant creates the same journal entries as she does to record the standard payroll liabilities using these amounts. When the next period starts, the accountant reverses the payroll liability accrual entry. This allows her to continue recording the payroll liability entries normally.

Financial Reporting of Payroll Liabilities

Payroll liabilities identify the amounts the company owes to various government agencies, employees and health insurance providers. Companies pay payroll liabilities within a short time frame, which qualifies these accounts as current liabilities. The accountant reports the current liabilities on the balance sheet at the beginning of the liabilities section.