Payroll Accounting and Related Liabilities

Payroll accounting involves recording employee compensation, related taxes, and benefit costs accurately and timely.

Companies must recognize both gross payroll expenses and withholdings for income taxes, social security, and other statutory obligations.

Proper payroll accounting ensures compliance with labor laws, tax regulations, and accurate presentation of liabilities and expenses.

Errors in payroll accounting can result in penalties, misstated liabilities, and damaged employee trust.

Overview / Definition

Payroll accounting tracks and records all expenses related to employee compensation, including wages, salaries, bonuses, benefits, and withholding taxes.

It also involves recognizing employer obligations for items such as social security contributions, unemployment insurance, and retirement plan contributions.

Payroll liabilities are typically short-term obligations and must be settled promptly to comply with legal and contractual requirements.

Recognition and Measurement

Key Components of Payroll Accounting:

✦ Gross Salaries and Wages: Total compensation before deductions.

✦ Employee Deductions: Income tax, social security, health insurance, retirement contributions.

✦ Employer Contributions: Employer’s share of social security, Medicare, unemployment taxes, and benefits.

✦ Accrued Payroll Liabilities: Unpaid salaries and related taxes at the end of the reporting period.

Example – Payroll Calculation:

• Gross Monthly Salary: $5,000

• Federal Income Tax Withheld: $800

• Social Security Withheld (6.2%): $310

• Medicare Withheld (1.45%): $72.50

• Health Insurance Premium Withheld: $200

Net Pay = $5,000 – ($800 + $310 + $72.50 + $200) = $3,617.50

Employer Payroll Taxes:

• Social Security (6.2%): $310

• Medicare (1.45%): $72.50

• Unemployment Tax: $100

Total Employer Payroll Tax Liability = $482.50

Journal Entry on Pay Date:

debit Salaries and Wages Expense – 5,000

credit Employee Income Tax Payable – 800

credit Social Security Payable – 310

credit Medicare Payable – 72.50

credit Health Insurance Payable – 200

credit Cash – 3,617.50

Employer Payroll Tax Entry:

debit Payroll Tax Expense – 482.50credit Social Security Payable – 310

credit Medicare Payable – 72.50

credit Unemployment Tax Payable – 100

Journal Entry Examples

1. Accruing Unpaid Salaries at Month-End ($10,000):

debit Salaries and Wages Expense – 10,000

credit Salaries Payable – 10,000

2. Payment of Accrued Salaries:

debit Salaries Payable – 10,000

credit Cash – 10,000

3. Remitting Withheld Taxes to Tax Authorities ($1,500):

debit Employee Tax Payable – 1,500

credit Cash – 1,500

Disclosure Requirements

Companies must disclose:

✦ Total payroll expenses recognized during the reporting period.

✦ Significant outstanding payroll liabilities at the balance sheet date.

✦ Information on employee benefit obligations and related expenses.

✦ Any contingent liabilities related to payroll disputes or pending legal claims.

Disclosures are typically presented in the Notes to Financial Statements under Operating Expenses and Current Liabilities.

IFRS Comparison

Criteria	US GAAP	IFRS (IAS 19)
Employee Benefits	Short- and Long-Term Recognized Separately	Similar Treatment
Accrual of Payroll Liabilities	Required	Required
Presentation of Social Security Taxes	Separately Identified	Separately Identified
Disclosure of Employee Benefits	Required for Pension and Post-Employment Plans	Extensive Disclosures Required

IFRS requires more detailed disclosure of employee benefits, particularly for defined benefit pension plans and long-term benefit arrangements.

Common Errors

✦ Incorrect Calculation of Withholding Taxes: Leads to underpayment or overpayment of taxes, resulting in penalties.

✦ Failure to Accrue Payroll at Period-End: Understates expenses and liabilities, distorting profitability and liquidity.

✦ Misclassification of Employer Contributions: Recording employer tax obligations as expenses only when paid rather than when incurred.

✦ Late Remittance of Withheld Taxes: Causes interest charges, penalties, and regulatory issues.

✦ Insufficient Disclosure of Payroll Liabilities and Expenses: Fails to provide stakeholders with full visibility of employee-related financial obligations.