Payroll journal entry: examples and best practices

What is a payroll journal entry?

A payroll journal entry records wages, taxes, and deductions in a company’s general ledger. It tracks payroll liabilities, employee compensation, and tax withholdings, ensuring all payroll-related transactions are documented correctly.  Recording these transactions correctly keeps payroll processing smooth and helps businesses stay compliant with IRS regulations.

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Every payroll processing cycle requires at least two journal entries. The first entry records gross wages, tax withholdings, and deductions. This includes payroll expenses like salaries, health insurance, and retirement plans. The second entry records payments to employees and tax agencies, reducing outstanding liabilities once wages and taxes are paid.

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Using payroll software automates this process, reducing discrepancies and improving functionality. Platforms like QuickBooks integrate payroll with accounting, making it easier to track payroll transactions without manual errors. Automation ensures every pay period is recorded properly, preventing missing entries or misclassified expenses.

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A well-maintained payroll journal entry helps businesses manage cash flow, comply with tax regulations, and keep payroll records organized. Whether handled manually or through payroll software, tracking wages and deductions correctly ensures smooth payroll processing and keeps financial records in check.

Types of payroll journal entries

There are several types of payroll journal entries, each serving a specific purpose in payroll accounting.

Initial recording of payroll

This entry records employee earnings and deductions when payroll is processed. It includes:

• Gross wages, which reflect the total earnings before deductions.
• Payroll taxes, including federal, state, and local tax withholdings.
• Payroll deductions for benefits like health insurance and retirement plans.
• Employer contributions to benefits and payroll tax expense for Social Security, FICA, and state unemployment taxes.

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The general ledger records these amounts as payroll liabilities until wages are paid.

Accrued wages and payroll liabilities

If payroll is earned but unpaid at the end of a pay period, an accrued wages entry is recorded. This ensures expenses are recognized in the correct accounting period. The unpaid wages remain in a liability account until the company issues employee paychecks or direct deposit.

Payroll tax expense journal entry

Employers pay additional taxes beyond employee withholdings, which must be recorded separately. This includes:

• FICA taxes (Social Security and Medicare).
• Federal unemployment and state unemployment taxes.
• Employer-paid portions of health insurance or other required benefits.

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Tracking these payments in the general ledger ensures that payroll reports remain accurate.

Manual payment entry

If payroll is paid by check instead of direct deposit, a manual payment entry records the transaction. This is also used for correcting payroll errors from previous entries or for issuing one-time payments outside the normal pay period.

Reversing payroll journal entries

Mistakes happen, and when they do, a reversing entry corrects payroll errors from past accounting periods. This ensures that financial statements and payroll reports accurately reflect payroll expenses and liabilities.

How to record payroll in the general ledger

Accurately recording payroll in the general ledger ensures wages, taxes, and deductions are properly accounted for in a company’s financial statements. Each pay period, businesses must track wages, payroll liabilities, and tax obligations. Follow these steps to keep payroll records accurate.

Step 1: Record gross pay

Start by recording the total wage expense before deductions. This includes salaries, hourly wages, bonuses, and other earnings.

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Entry: Debit the wage expense account to reflect employee compensation.

Step 2: Record payroll deductions

The next step is to account for employee payroll deductions, including taxes and benefits. These amounts are withheld from employee earnings and recorded as liabilities until paid to the appropriate agencies.

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Entry: Credit liability accounts for federal income tax, state income tax, Medicare taxes, payroll taxes, and benefits like health insurance.

Step 3: Record net pay distribution

After deductions, employees receive their net pay, either by direct deposit or paychecks.

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Entry: Credit the cash account or bank account for the total amount paid to employees.

Step 4: Record employer taxes

Employers must also contribute payroll taxes, which are recorded separately.

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Entry: Debit the payroll tax expense account. Credit payroll liabilities for employer-paid taxes like FICA, federal unemployment, and state unemployment taxes.

Step 5: Double-check and reconcile

Before closing payroll records, review all payroll reports to ensure totals match the company’s financial statements. This prevents discrepancies and ensures compliance with tax obligations.

Best practices for payroll journal entries

Recording payroll correctly ensures accurate financial statements, compliance with IRS regulations, and smooth payroll processing. Following these best practices helps businesses avoid errors, track payroll liabilities, and maintain organized records.

Automate and organize your records

Stop tracking payroll manually – it's time-consuming and prone to errors. Modern payroll software like QuickBooks does the heavy lifting for you, automatically recording wages, withholdings, and benefits. Keep detailed documentation of employee wages, transactions, and employer contributions, including all tax elements – federal, state, and payroll taxes. This organization not only saves time but also gives you peace of mind knowing your entries are accurate and you're prepared for tax season.

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Maintain regular financial checks

Make it a habit to compare your payroll reports with financial statements after each pay period. Verify that your payroll transactions align with recorded expenses and ensure you're using the right accounts for different types of payroll costs. Place employee wages under your salaries expense account, and keep employer-paid taxes in their own liability accounts. This clear structure makes it easier to catch discrepancies early, before they turn into bigger problems.

Set a consistent schedule and track deadlines

Create a fixed schedule for your payroll journal entries, whether bi-weekly or monthly, and stick to it. This routine helps prevent forgotten entries and ensures you meet tax payment deadlines. Keep track of your payroll liabilities and payment due dates for all tax types – federal, state, and payroll. Consider setting up automated reminders through your payroll software to avoid costly late fees and maintain smooth operations.

Avoiding common payroll journal entry mistakes

Mistakes in payroll journal entries can lead to tax penalties, misclassified expenses, and inaccurate financial statements. Avoid these common errors to keep payroll records accurate.

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Don't forget to record accrued wages. If employees have earned wages but haven’t been paid by the end of a pay period, those wages should be recorded in a liability account as accrued wages. Once paid, the entry should be adjusted to reflect the actual payout.

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Make sure to classify deductions correctly. Payroll deductions for health insurance, retirement plans, and tax withholdings should be recorded separately. Misclassifying these deductions can lead to incorrect tax filings and payroll reports.

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Always reconcile with bank transactions. Always compare paychecks and direct deposit transactions to the cash account and bank account to ensure the correct amounts were paid. Missing or duplicate payments can cause discrepancies in payroll data.

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Remember to record employer payroll taxes. Employers must record payroll tax expense for taxes they owe, including Medicare taxes, FICA, and federal unemployment taxes. Forgetting these entries can result in tax compliance issues.

Managing payroll costs with the right tools

A payroll journal entry keeps track of payroll expenses, tax withholdings, and employee compensation, ensuring businesses stay compliant and maintain accurate financial statements. Recording payroll correctly prevents discrepancies, avoids tax penalties, and helps businesses manage payroll efficiently.

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Using payroll software like QuickBooks simplifies payroll processing, reducing manual errors and improving functionality. Automation ensures that every pay period, wages, deductions, and payroll transactions are accurately recorded, keeping businesses in line with IRS requirements.

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For businesses looking to take efficiency a step further, Ramp offers smarter financial tools that go beyond payroll. With automated expense tracking, seamless accounting software integration, and real-time financial insights, Ramp helps businesses manage payroll costs and overall spending more effectively. Small business owners can streamline financial operations, reduce time spent on manual tracking, and ensure compliance with tax deadlines.

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Managing payroll is just one piece of the puzzle. Having the right financial tools ensures businesses can focus on growth while maintaining financial accuracy. Learn how Ramp can help your business today.