How to Do Payroll

Accounting: A Step-by-Step
Guide for Employers
PUBLISHED MARCH 7, 2023

REVIEWED BY:
Charlette Beasley

WRITTEN BY:
Heather Landau
This article is part of a larger series on How to Do
Payroll.
Table of Contents

1. 1Set Up The Chart of Accounts

2. 2Gather Payroll Reports
3. 3Record Payroll Journal Entries
4. 4Post Payroll Journal Entries to the General Ledger
5. 5Reconcile Payroll to General Ledger
6. 6Bottom Line

Payroll accounting is the recording and tracking of all payroll

transactions. These transactions include paychecks distributed
to employees, deductions and taxes withheld from employee
paychecks, and employers’ share of benefit contributions and
taxes.

To get started, you’ll need to set up a chart of accounts and

gather reports from your payroll system. Having the right
information will ensure your payroll journal entries are
accurate and save you from having to do correcting entries
later.

If you’re interested in simplifying the payroll accounting

process, consider using a payroll software. Some integrate
directly with accounting softwares while others will create a
report you can import in. Check out the top rated payroll
softwares below:

Here are five steps to follow to do payroll accounting

manually:

1. Set Up The Chart of

Accounts
Recording payroll on your books involves making sure that
amounts are accurately posted to payroll accounts. Before you
can record payroll, you will need to set up payroll accounts on
your chart of accounts list.

Definition: The chart of accounts is a list of accounts that is

used to categorize the financial transactions that your business
generates.
The accounts that you need to set up to track payroll will
generally be an expense account or a liability account. An
expense is a cost that you have incurred as a result of doing
business, like for wage expense and health insurance. A
liability is money that you owe to others. An expense can be a
liability, albeit temporarily, until it’s paid.

For example, workers’ compensation is recognized as an

expense once the time period that the premium covers has
elapsed. At that time, if the payment has not been made, the
amount becomes a debt and should be recorded as a liability
until it’s paid to the insurance provider.

It’s important to remember that the amounts you withhold

from employee paychecks to cover their responsibility toward
benefits or taxes should never be booked as a business
expense, because it isn’t.

Below is a list of the accounts you will generally need to set up

on your chart of accounts to track all payroll-related activities,
along with a brief description of each account. There are some
accounts you may not need, like health insurance if it’s not
offered and others that are required, like federal income tax
payable, to comply with payroll laws.

Download your free payroll chart of accounts list for future

reference.

Account Name Account Type

Gross Wage Expense Expense

Health Insurance Expense Expense

401(k) Match Expense Expense

Federal Tax Withholding Liability

FICA Tax Payable Liability

FUTA Payable Liability

SUTA Payable Liability

Account Name Account Type

State Disability Payable1 Liability

Workers' Comp Payable Liability

Employee Health Insurance Payable Liability

401(k) Employee Contribution Liability

Accrued Vacation Payable Liability

Accrued Sick Payable Liability

The accounts you will need to set up to track payroll are:

 Gross Wage Expense: Include the amount that you pay

to an employee every pay period before any deductions
are made.
 Health Insurance Expense: Include the total amount of
health insurance that you pay to your insurance provider
(ex. Blue Cross). This can include medical, vision, and
dental; if you have more than a handful of transactions
though, we recommend creating subledger accounts for
each insurance type, so they’re easier to track.
 401(k) Matching Expense: If you offer a 401(k) plan to
your employees, include the number of contributions you
have made to match your employee contributions in this
account. This money will be paid to the investment
company that is responsible for maintaining the company
401(k) (ex. Fidelity).
 Federal Tax Withholding: This account should reflect
the total amount of income taxes you have withheld from
all employee paychecks. You will remit these funds to the
IRS based on the deadlines set by them. You should
 withhold from employee paychecks each pay period, and
leave the money in this account until you remit it to the
IRS for payment.
 State Tax Withholding: It serves the same function as
the federal tax withholding, except for state taxes instead
of federal. If your employees are obligated to pay local
taxes, you should create a separate account for it too.
 FICA Tax Payable: Deductions from employee paychecks
for Social Security and Medicare taxes will accumulate in
this account. You will remit these funds to the IRS based
on the applicable deadlines.
 SUTA Payable: This account should include the state
unemployment taxes that you are responsible for paying.
The money should stay in this account until you remit it
for payment.
 State Disability Payable: This account should include
the state disability taxes that you have withheld from
employees, if applicable.
 Workers’ Compensation: In this account, you need to
reflect the amount of workers’ compensation due.
 Employee Health Insurance Payable: This account will
include the amount withheld from employee paychecks
for health insurance coverage. This account will reduce
the amount of health insurance paid by the employer.
 401(k) Employee Contribution: All employee 401(k)
contributions withheld from paychecks will accumulate in
this account. This money will be paid to the investment
company that is responsible for maintaining the company
401(k) (e.g., Fidelity).
 Accrued Vacation Pay: If you offer your employees time
off with pay, then you need to keep track of the amount of
time they have earned on the books. If an employee earns
a certain number of vacation hours each pay period, you
should record its value as accrued vacation because it is
money that you owe to the employee. If they were to quit
or you fired them, then you would have to include all
accrued vacation pay in their final paycheck.
2. Gather Payroll Reports
Once you’ve created your chart of accounts, you’re ready to
record your payroll accounting journal entries. Of course,
before you can actually post a transaction to the books, a
transaction must have occurred. The regular transaction you
should be posting is the payroll journal entry; you should
create it after processing payroll so the record is based on an
actual event that has taken place. You’ll need to gather solid
source documents, like a payroll register and other payroll
reports, before entering any information.

 Payroll Register: This shows detail for all payroll

transactions that have occurred during a pay period
(includes names, pay dates, payment amounts, etc.)

If you don’t have a payroll system, check out our guide

to doing payroll in excel. We have an easy to use template
that makes processing payroll manually much simpler. It’s
important to keep in mind that preparing payroll in Excel can
be difficult if the business has more than a handful of
employees.

 Insurance Bills: Monthly invoice from insurance

provider with breakdown of charges by employee and any
administrative fees
 Payroll Tax Reports: These show a breakdown of the
taxes you owe plus taxes you withheld from employee
paychecks

If you use payroll software like Gusto, you can easily pull
these reports from their system with just a few easy clicks.
Since Gusto can help you broker health insurance plans
directly through their platform, you can easily pull reports that
include not only your employee payroll and tax amounts, but
your health insurance expenses, as well. Try it today for 30
days.
 Visit Gusto

3. Record Payroll Journal

Entries
A journal entry is best described as the recording of debits
and credits. It generally includes an effective date, a debit
amount, and a credit amount. If you use an accounting
program like QuickBooks, you don’t have to enter journal
entries often because QuickBooks does that for you “behind
the scenes” when you create an invoice for a customer or pay a
bill.

However, if you use a manual accounting system, you will need

to create journal entries.

When recording payroll, you’ll generally debit Gross Wage

Expense, credit all of the liability accounts, and credit the cash
account. Gross Wages will appear on your Profit and Loss or
Income Statement, and the liability and cash accounts will be
included on your Balance Sheet.

Journal Entry to Record

$10,000 in Payroll Expense
Debit
Account Name Credit
Entry

Gross Wage Expense $10,000

Federal Tax Withholding $1,000

 Debit
Account Name Credit
Entry

FICA Tax Payable $2,000

Employee Health Insurance Payable $1,000

401(k) Employee Contribution $2,000

Cash $4,000

Journal Entry to Record

Paying Expense Being Held as
Liability
You’re not always going to pay an expense at the time you
book it. For instance, when you expense an employee’s gross
earnings, you may not be ready to remit the associated payroll
tax expenses, such as FICA (Social Security & Medicare).

In this case, you would credit a liability account, or payable,

until you’re ready to pay. In the entry above, we booked
$2,000 to FICA Tax Payable.

When you’re ready to pay the tax agency, whether that be

every two weeks or once a month, you’ll need to debit the
FICA Tax payable account to clear the account of the amount
you’re about to pay and credit Cash, since money will be
moving out.
Account Name Debit Entry Credit

FICA Tax Payable $2,000

Cash $2,000

Journal Entry to Record

Accrued Vacation
When recording payroll, you’ll also have to account for
any accrued vacation. Let’s say an employee gets 10 vacation
days each year and is paid on a biweekly pay period. You
would calculate the number of vacation hours this employee
would accrue each pay period as follows:

10 vacation days x eight hours = 80 hours

(number of vacation hours earned each year)

80 hours / 26 weeks (pay periods per year) = 3.08 hours

(number of vacation hours earned)

To accrue vacation on the books, you must use a journal entry.

Below is an example of the journal entry we would record for
an employee who earns a wage of $30 per hour.

$30 x 3.08 hours = $92.40

Account Name Debit Entry Credit

Gross Wage Expense $92.40

 Account Name Debit Entry Credit

Vacation Payable $92.40

Journal Entry to Record

Accrued Sick Pay
Similar to accrued vacation pay, you’ll also need to keep track
of the amount of sick pay an employee has earned on the
books. You can establish how much sick pay an employee
would earn per pay period (as we did in the above accrued
vacation pay example).

Let’s assume this employee has earned one hour of sick pay at
a $30 per hour wage. Our journal entry would be as follows:

Account Name Debit Entry Credit Entry

Gross Wage Expenses $30.00

Sick Payable $30.00

Accrued Payroll
The accrued payroll account houses any net payroll amounts
(payable to employees) that have been expensed but have not
yet been paid.

For Example: Assume that Ella gets paid every two weeks (10
working days), $100 a day for work performed Monday
through Friday.

$100 per day x 10 days = $1,000

Her next payday is Friday, Dec. 3, 2021, which covers work
she performed from Nov. 22 through Dec. 3. The issue here is
that most businesses close their books at the end of each
month – in this case, Nov. 30. Only a portion of Ella’s paycheck
would be expensed the seven days she worked through Nov.
30.

$100 per day x seven days = $700

When you or your bookkeeper goes to close the books for

November, $700 will need to be recorded as a credit to be paid
in your accrued payroll account. When you pay the full $1,000
balance on Dec. 3, you’ll clear the balance by debiting the
account for $700.

4. Post Payroll Journal

Entries to the General
Ledger
Once you’ve finished entering your journal entries, you should
review them for accuracy before officially posting to the
general ledger – many systems won’t let you reverse the entry.

Check the numbers against the data you gathered from your
payroll system. Does the total gross wage expense entry tie to
your total payroll expense for the period? Be sure to confirm
that your debits equal your credits (basic accounting systems
should confirm this).

If you have the support, it’s a good idea to designate at least

one or two other employees as secondary reviewers—someone
in accounting or who won’t present a conflict of interest. This
will ensure your journal entries have additional eyes on them
before they post; it can also be helpful if you’re out on a day
that payroll journal entries need to be posted.

5. Reconcile Payroll to
General Ledger
One final stage in payroll accounting is to do a payroll
reconciliation. A payroll reconciliation is a process you follow
to ensure your payroll accounts within the general ledger
accurately reflect the transactions that occurred in the payroll
system. It also helps you to ensure that you are
within budget throughout the year. We gave you some tips in
prior steps to help check yourself along the way, but a payroll
reconciliation is a more in-depth approach.

Most companies do it at least monthly and definitely at year-

end. Doing monthly reconciliations on a regular basis will
ensure you have time to enter a correcting journal entry before
the books are closed for the month, making future payroll
audits and research much easier to follow.

The Bottom Line

If you’re overwhelmed with the many aspects of learning how
to do payroll accounting, you’re not alone. It’s important to
choose a quality accounting program that will make
documenting transactions easier. You’ll thank yourself when
an audit arises or you just need to prepare an income or cash
flow statement at year-end.