Payroll Concepts and Entries for Accounting Staff

Field	Value
Owner	Unassigned — needs an owner
Department	General Accounting
Effective date	Not set in source
Scope	Payroll components, taxes, and the general ledger entries accounting staff make for accrued payroll. Written for accounting staff, not payroll processors — it explains what payroll produces and how to record it. Does not cover processing a payroll in ProWork.
Source	`General Accounting/11 - Accrued Payroll/Payroll Concepts.docx`

Earnings

Earning type	Description
Salaries and wages	Regular pay for hours worked in the period, hourly or salary. Hourly employees often capture hours in a POS system like Brink or Aloha, or in a time and attendance product like ProWork. Salary employees are paid a yearly amount regardless of hours, usually with stipulations for a minimum number of hours per week.
Overtime pay	Additional compensation for hours beyond regular work hours, as required by contract or labor law.
Bonuses and commissions	Additional compensation based on performance or achievement of goals.
Vacation, sick, and PTO	An employer benefit paying an employee for hours not worked. Policies vary widely and may be based on hours worked, seniority, or state law.
Retro pay	Earnings missed or paid incorrectly on a prior payroll.
Reimbursements	Repayments of business expenses paid by an employee — mileage is common. Often not taxable as an earning.
Tips	Charge (credit) and cash (declared) — see below.

Exempt vs. non-exempt

Overtime law varies by state. Employees are categorized as exempt or non-exempt:

Exempt employees are exempt from overtime pay and are paid the same rate regardless of hours.
Non-exempt employees must be paid overtime according to state law.

For standards on exempt employees, see the Department of Labor overtime fact sheet.

Charge tips vs. cash tips

Type	How it's paid	Effect on net pay
Charge (credit) tips	Paid to employees through their paycheck during payroll processing	Increases net pay
Cash (declared) tips	Paid in cash or through a tips processing company (Kickfin, Gratuity Solutions) at the end of a shift, then entered in payroll for wage recording and tax collection	Only the deduction of taxes — the employee has already received the gross amount

Deductions

Employee payroll deductions are amounts withheld from a paycheck. They can be mandatory (required by law) or voluntary (chosen by the employee), and pre-tax (deducted before taxes are calculated, reducing tax paid) or post-tax.

Mandatory deductions (excluding taxes)

Wage garnishments — court-ordered deductions for debts like child support, student loans, or unpaid taxes. The court order specifies the deduction amount and the limit of how much can be deducted from a paycheck based on the paycheck amount.

PBI deducts a per-order admin fee from the employee. The fee is subject to state limits but is usually between $1 and $3.

Voluntary deductions

Deduction	Notes
Retirement contributions	Employer-sponsored 401(k) plans — Traditional (pre-tax) or Roth (post-tax). Based on a percentage of earnings or a flat amount per paycheck. Employers can also contribute via a match.
Health insurance premiums	Medical, dental, or vision. Usually pre-tax under Section 125 plans, but taxability is determined by the employer, plan provider, and state/federal law. Cost may be 100% employee-paid or partly employer-paid. Enrollment changes are usually limited to an enrollment period or a qualifying event.
Additional insurance premiums	Group life, disability, identity theft. Usually post-tax.
FSA contributions	Pre-tax funds for healthcare or dependent care. The IRS sets the annual maximum and the amount of unused funds that can carry over. See FSAFEDS.
HSA contributions	Pre-tax funds for medical expenses, if enrolled in a high-deductible health plan (HDHP). See FSAFEDS.
Union dues	For employees who are part of a labor union.
Employee advance or loan	Deductions repaying an employer for advanced or loaned funds — for example relocation costs paid ahead of earnings. Usually post-tax.

Taxes

Employee payroll taxes

Deducted directly from the employee's paycheck.

Tax	Rate and notes
Federal income tax (FIT)	Withheld based on earnings and the employee's Form W-4 (filing status, dependents). Progressive rates.
State income tax (SIT)	Most states require withholding, with rates varying by state. A few states — Texas, Florida — impose no state income tax.
Social Security (OASDI)	6.2% of wages up to the wage base limit ($176,100 in 2025). Funds retirement, disability, and survivor benefits.
Medicare	1.45% of all wages. Funds health insurance for people 65+ or with certain disabilities.
Local payroll taxes	Some cities or municipalities impose additional taxes — school district taxes, occupational privilege taxes.

Employer payroll taxes

Paid by the business in addition to amounts withheld from employees.

Tax	Rate and notes
Social Security (employer portion)	6.2% of each employee's wages up to the wage base limit ($176,100 in 2025) — matches the employee contribution.
Medicare (employer portion)	1.45% of each employee's wages, no wage base limit. Employers do not pay the additional 0.9% Medicare surtax, which applies only to employees above a threshold.
FUTA	6.0% on the first $7,000 of each employee's wages. Employers may qualify for a credit of up to 5.4%, reducing the effective rate to 0.6%. Some non-profits are exempt.
SUTA	State-level equivalent of FUTA. Rates and wage base limits vary by state. Generally employer-paid, though a few states require employee contributions. Some non-profits are exempt.
Industry-specific taxes	Construction, transportation, and other industries may face additional taxes or levies depending on state or federal law.

Reporting and filing

Employers must accurately calculate, report, and deposit these taxes to avoid penalties. Tax collected must be remitted to the appropriate agency on the agency's schedule — which may be each check date, monthly, or quarterly.

Quarterly reports cover check dates, not pay period end dates. Using period end dates produces incorrect filings.

Form	Reports
Form 940	FUTA deposit notice — total wages, exempt wages over the $7,000/employee limit, tax calculated, and tax remitted.
Form 941	Employer's Quarterly Federal Tax Return — taxable wages, amounts deducted from employees for FIT/Social Security/Medicare, employer Social Security/Medicare, and tax remitted.
State forms	Each state requires different forms for state income tax collected and/or state unemployment paid. Same concept as the 940/941.
Local forms	If local payroll taxes are collected, the city, municipality, or district requires additional forms reporting wages, taxes collected, and taxes remitted.

At year end, employers file Form W-3 with the IRS and issue W-2s to employees. The W-3 lists and summarizes all W-2s issued. The W-2 reports gross wages, taxable wages, and taxes deducted.

All W-2s must be post-marked by January 31st each year.

How net pay is calculated

Gross pay
  − Pre-tax deductions
  − Taxes
  − Post-tax deductions
  = Net pay

Workers' compensation insurance

Not technically a tax, but most states require employers to carry workers' compensation, which provides benefits to employees injured on the job.

Work comp is based on rates for the type of work performed and the employer's claims history. The rate is multiplied by wages in the policy period, based on the payroll check date.

At the end of the policy period the carrier performs an audit and requests documentation — typically 941/940s, payroll registers, the general ledger, and subcontractor reports.

It is the accounting manager's responsibility to oversee the work comp audit.

Some clients use ProWork to calculate work comp expense for each payroll, which then becomes part of the GL entry. If a client is interested in adding this feature, contact your client success manager.

Accrued payroll

Accrued payroll is the portion of employee compensation earned by employees but not yet paid as of the end of an accounting period. It represents the employer's obligation to pay employees for work performed during the period, regardless of whether payment has been made.

Accrued payroll is recorded as a liability on the balance sheet. The corresponding income statement entry reflects the expense, so the financial statements accurately show both obligations and operating expenses. Once paid, the liability is reduced and the cash disbursement recorded.

Why accruing matters

Accurate financial reporting — recognizing the expense when earned rather than when paid gives a more accurate picture of performance.
Matching principle — expenses are recognized in the same period as the revenues they help generate.
Compliance with accounting standards — GAAP and IFRS require expenses to be recognized in the period incurred, regardless of when cash is paid.
Better decision making — accurate statements give a clearer understanding of true financial position.

Entries on the pay period end date

Payroll item	Debit	Credit
Earnings	Labor Expense
Reimbursements	Corresponding expense line (uniform reimbursement → uniform expense)
Employee payroll taxes		Accrued Payroll
Child support and garnishments		Accrued Payroll / Garnishment Payable
Employee insurance premiums		Health Insurance Expense
FSA/HSA		FSA/HSA Liability
Union dues		Union Dues Payable
Employee retirement		Retirement Plan Payable
Employee advance		Employee Advance Receivable
Net checks / direct deposit		Accrued Payroll
Employer payroll taxes	Payroll Tax Expense	Accrued Payroll
Employer retirement match	Retirement Plan Expense	Retirement Plan Payable

Entries on the pay date

Payroll item	Debit	Credit
Net checks / direct deposits	Accrued Payroll	Checking Account
Payroll tax deposits	Accrued Payroll	Checking Account
Child support / garnishments	Accrued Payroll / Garnishment Payable	Checking Account
Retirement	Retirement Plan Payable	Checking Account
Union dues	Union Dues Payable	Checking Account
FSA/HSA	None — the liability is relieved as employees are reimbursed for the funds	None
Billing	Accounting/Payroll Expense	Checking Account
Workers' compensation	Work Comp Expense	Accrued Work Comp

Test your understanding

Payroll knowledge check

Nine questions covering earnings, garnishment fees, quarterly forms, and accrual entries.

Payroll knowledge check
Set up GL exports in ProWork — how the payroll GL entry is produced
Export payroll from Aloha Enterprise — how hours reach the CSM
Positive pay file policy — payroll check positive pay files
Financial analysis — labor and benefits review at period end