Mastering The Payroll Journal Entry: Definition, Examples, and Tips

Payroll journal entries are the backbone of any well-staffed business’s financial records. They provide a clear picture of your biggest and most valuable expense: your team.

A payroll journal entry details wages, taxes, and withholdings in your ledger. In this article, you’ll learn about the different types of entries and how to record them. Plus, find examples and best practices to keep in mind.

What Is a Payroll Journal Entry?

Payroll journal entries are listings in your general ledger. They show how much you paid your workers during a chosen time period. They might outline gross wages, accrued wages, or miscellaneous payments made to employees. 

As a business owner, you should understand how payroll journal entries work, even if you have an accounting team keeping your books. You’re ultimately responsible for reporting the right numbers. Payroll costs are often one of the biggest expenses for a business, so the cost of mistakes adds up fast. When you know what the entry should look like, you can spot those errors more easily.

Here’s what a typical payroll journal entry includes:

• Compensation. These are wages, bonuses, and any other types of pay the employee earns before taxes and deductions.
• Benefits. Benefits include items like health insurance and retirement plans. Journal entries for these show how much the company pays and how much is deducted from the employee’s paycheck.
• Payroll Taxes. Both you and your employees pay taxes that relate specifically to wages and salaries. These include your contributions to each employee’s Social Security and Medicare taxes. They also include your employees’ contributions, which you withhold from their paychecks.

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3 Types of Payroll Journal Entries

As a small business owner, you’ll encounter a few types of payroll journal entries. Each one records specific aspects of your payroll process.

Here are the key types to know about:

1. Initial Recordings

Initial recordings are the starting point for your payroll recordkeeping. They’re the first entries you make in the ledger each pay period.

These entries show each employee’s total gross wages. They also include deductions from employee paychecks, like payroll taxes and benefit payments. You make these entries every week or two based on your payroll schedule.

2. Accrued Wages

You may have to record wages that your employees have earned, but you haven’t paid out yet. When this happens, you record the owed wages as an accrued expense. This makes sure your financial records reflect your labor costs for that period.

Once you actually pay out the wages, you adjust the entry to show the cash outlay.

3. Manual Payments

There may be times when you need to pay an employee outside of your regular payroll process. In these cases, you record the payment as a manual entry in your books.

You might make a manual payments when you:

• Fix an error on a previous paycheck
• Give an employee a performance bonus
• Payout unused vacation or sick time when someone leaves the company

How To Record Payroll Journal Entries

Here’s how to record payroll entries in a few simple steps:

1. Set Up Payroll Accounts

First, create accounts in your ledger for all payroll-related items. This separates each type of expense and organizes your books. Accounts may include wage expenses, payroll taxes payable, and employee benefits.

2. Calculate Taxes and Deductions

Next, determine how much you need to withhold from each employee’s gross pay for taxes and other deductions. Tax laws can vary by location, so make sure you understand the rules in your area.

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3. Record Payroll Expenses

Now, record your total payroll expenses in your books. This includes gross wages, employer taxes, and any other payroll-related costs.

4. Record Payroll Liabilities

After recording your payroll expenses, enter your payroll liabilities. These are the amounts you owe but haven’t paid yet, like taxes withheld from employees’ paychecks.

5. Double Check Your Work

Double-check that everything is correct. Compare your entries to your payroll reports and make sure your debits and credits balance. If you spot any errors, make adjustments as needed. This step helps you catch mistakes before they cause bigger problems down the line.

3 Examples of Payroll Journal Entries

When you make a journal entry, you record transactions using debits and credits. These debits and credits should be equal. If they aren’t, you know you’ve made a mistake somewhere down the line.

Here are three concrete examples to help you understand how payroll journal entries work:

1. Primary Payroll Entry

Say you own a masonry company with three employees. For a bi-weekly pay period, your payroll looks like this:

Account	Debit	Credit
Wage Expenses	$3,700
Payroll Tax Expenses	$740
Employee Benefits Expenses	$150
Cash		$3,700
Payroll Taxes Payable		$740
Employee Benefit Payable		$150

In this entry, you record the gross wages, taxes, and benefit costs for all three employees.

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2. Accrued Wages Entry

Suppose you own a small roofing company with two employees. At the end of the quarter, you have the following unpaid wages:

• Regular wages: $5,000
• Overtime wages: $1,500
• Vacation pay: $750

The ledger entry would be as follows:

Account	Debit	Credit
Wage Expenses	$5,000
Overtime Wage Expenses	$1,500
Vacation Expenses	$750
Wages Payable		$5,000
Overtime Wages Payable		$1,500
Vacation Payable		$750

This entry records the regular wages, overtime wages, and vacation pay you owe your employees.

3. Manual Payment Entry

Imagine you’re a handyman with a couple of part-time assistants. One of your workers is moving out of state and switching bank accounts, so you need to issue their final paycheck manually. The total amount is $1,800, which includes $300 in overtime pay.

Here’s the paid wages journal entry to record this manual termination payment:

Account	Debit	Credit
Wage Expenses	$1,500
Overtime Wage Expenses	$300
Cash		$1,800

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3 Pro Tips on Accounting for Payroll Expenses

Here are a few tips to help you stay organized and on top of your payroll accounting. These strategies can save you time and headaches in the long run:

• Use Accounting Software. Investing in good accounting software for payroll will make your life a lot easier. These programs automate many of the calculations and recordkeeping tasks involved in payroll. They can also track employee hours, calculate taxes and deductions, and generate journal entries.
• Keep Detailed Records. Even with accounting software, keep detailed records of all your payroll transactions. This includes timesheets, pay stubs, and any other relevant documents. Having a clear paper trail can be a lifesaver if you ever face an audit or need to resolve a discrepancy.
• Set Up a Tax Payment Schedule. Submitting your payroll taxes on time avoids penalties and interest. It also keeps your books up to date. To stay on track, create a schedule of all the tax deadlines you need to meet throughout the year. Set reminders for yourself to ensure you make all your payments on time.

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Automate Bookkeeping by Syncing Your Joist and QuickBooks Online Accounts

Payroll journal entries make it easier to track your expenses. But Joist is here to streamline all your bookkeeping tasks. 

Manage, organize, and automate your books with Joist’s QuickBooks Online sync. Plus, you can track client relations and send estimates from anywhere. Spend less time keeping records and more time doing your job.