How to record payroll journal entry

So you invite a friend out for lunch and decide to cover the entire bill, which totals $140.

After the meal, you notice your friend received a parking ticket. As a gesture of thanks, you pay the $30 ticket for them. The total expense of $170 was worth it for the enjoyable time spent with your friend.

Similarly, payroll journal entries involve accounting for both the gross wages and the withholdings or deductions. Just like how you paid the parking ticket on your friend’s behalf, employers pay taxes and other deductions on behalf of their employees. This means that the employer is responsible for deducting these amounts from the employee's gross wages and remitting them to the appropriate authorities (IRS, health insurance).

Here’s how to record a payroll journal entry:

Example Scenario

Total Payroll for the Period: $5,000
Withholdings:

• Taxes: $500

• Other deductions (e.g., health insurance): $200

Net Pay to Employees: $4,300

Journal Entry

Debit Entries:

• Salaries Expense: $5,000 (total payroll expense)

Credit Entries:

• Payroll Taxes Payable: $500 (tax withholdings)

• Other Deductions Payable: $200 (other withholdings)

• Cash (or Bank): $4,300 (net pay to employees)

This entry records the total payroll expense, the liabilities for withholdings, and the net cash paid to employees. By understanding this process, you can see how paying withholding taxes on behalf of employees is similar to paying the parking ticket on behalf of your friend—both are responsibilities taken on to ensure everything is accounted for properly.