When you become a business owner, it might seem that all a payroll entail is writing a check to your employees. However, there are way more elements to payroll than it might appear. Today, we are going to discuss the payroll expenses and how business owners would journalize these.
Salaries and Wages
One of the main components of the payroll expenses is the salaries and wages. These two are very similar. Salaries refer to yearly rates typically paid to executive and administrative employees. Wages, on the other hand, represent the hourly rates and are usually paid to manual laborers. From an accounting perspective, there is no difference and these two are simply combined.
Salaries and wages are an operating expense or more specifically a payroll expense and no matter what type of employee they are, the company has to pay money owed to employees for services provided. This expense is further broken down into three components:
- Gross earningsThese are money the employees earned based on the hours they worked or the salary contract they have with the company regardless of what the paycheck is written for. The bookkeeper records the gross earnings as Salaries and Wages Expense. Whatever the business promises to pay the employee under the contract is what is considered the salaries/wages portion of the payroll expenses.
- Payroll deductionsUnfortunately, employees do not get to take home their gross earnings. What happens with an employee in a company, even if it is your own business, the income an individual earns is going to get taxed by the federal government and most likely by state and city government as well. There is also the Social Security system along with no less important Medicare that employees need to contribute towards. Therefore, a portion of the earnings is taken away from the workers before they even get the money. Employees can also sign up for some deductions voluntarily. Examples of such deductions include retirement funds and healthcare plans.
- Net payThis is what the paycheck is written for. It is the money the employee takes home after all the deductions have been subtracted from the gross amount earned. Depending on whether the paycheck is given on the day of a journal entry or if the employee is going to be paid a little later, the bookkeeper will enter the value either under Cash or Wages/Salaries Payable.
Employer Payroll Taxes
The other portion of payroll expenses is made up of payroll taxes. These are mandatory payments an employer has to make just like its workers. The important aspect to remember is that these are taxes the employer owes and not something they pay on behalf of individuals who work for them. We can also point out specific types of taxes you would see here.
- Social Security
Every quarter, the employer will be filing a specific form (941), where they specify the number of people working for their business and their wages and withholdings for income tax owed to the federal government. This form also reports FICA taxes, which are the first two items in the list above. These taxes should match up to the tax deposits that were emitted throughout the quarter.
The next item we are going to look at is state unemployment. You also might have to file a quarterly unemployment report, which is due at the same time as form 941. The amount of SUTA is based on a certain percentage, which you will receive by mail and can check by logging into the unemployment website of your state to get your annual rate. You should keep in mind that some states do not have unemployment tax.
Lastly, all employers are required to file employer’s federal unemployment returns (940). Business owners must pay 0.6% of the first seven thousand dollars in wages they pay to each employee in FUTA. If we do some math, the FUTA is currently equivalent to $42 per employee.
Payroll Expenses: Journal Entries
We have mentioned some of the bookkeeping aspects of the payroll expenses. Now, let’s review the journal entries and how payroll expenses are reflected in the bookkeeping records. First, we look at the entries made when the employer recognizes the wages and salaries owed to its employee.
Wages and Salary Expense
Federal Income Tax Payable
Social Security Tax Payable
Medicare Tax Payable
Wages and Salaries Payable
The first item we record is an expense because the wages the employees earn are the total amount that will go out of the employer’s pocket. Then, we list all the deductions from the paycheck. You should notice that they are all payable because the employee simply serves as an intermediary between the employee and the government or another organization and has to pass this money to the appropriate entities.
The last item is the Wages and Salaries Payable. This is how much the actual paychecks are written for and what the employer owes to the people who work for the company. You can solve for the Salaries Payable by adding together the withholdings and deductions and subtracting that amount from the gross salaries (the first item).
The next step would be to record the other portion of payroll expenses, namely the various taxes paid to the government. Here’s how one would journalize the employer’s payroll tax expense.
Payroll Tax Expense
Social Security Tax Payable
Medicare Tax Payable
As you can see the numbers for the FICA taxes are the same as they were in the previous entry. However, now, the employer takes out this amount from their own pocket and adds to the money withheld from the individuals hired by the company. The SUTA and FUTA payments will vary depending on the location of a business and how much has already been paid as of the journal entry date. In some cases, you might also see a line for local taxes. To calculate the payroll tax expense amount, you simply add together all the credits.
As you can see, payroll expenses are simple and straightforward and at the same time, require a lot of calculations and making sure that no deadline is missed. If you are not sure about any part of the payroll, it is advised that you be in touch with a CPA or hire a bookkeeper. In either case, having a specialist taking care of your payroll expenses can save you from a lot of headaches and penalties.