Payroll accounting includes the computation of gross wages (hours worked times hourly pay rate) and other compensation such as salaries, employee commissions, and bonuses. Payroll accounting also involves payroll withholdings, such as Social Security and Medicare taxes, federal and state income tax withholdings, and voluntary withholdings. Voluntary withholdings include union dues, health insurance premiums, United Way contributions, and contributions to savings and retirement plans.
In addition to the computation of the gross wages and salaries, payroll accounting is involved with the calculation and reporting of other payroll related expenses. These additional employer expenses include the matching of Social Security and Medicare taxes, federal and state unemployment taxes, worker compensation insurance, paid holidays, paid vacation days, pension costs, health insurance premiums, and so on. These expenses can amount to an additional 40% of the employees' wages and salaries.
Because of accrual accounting and the matching principle, it is reasonable that companies should recognize the expense and liability of payroll related costs when they are earned by the employees—not when the company pays the costs. For example, the cost of providing agreed upon vacations should be reported as an additional labor cost and a liability when the employee is earning the vacation. Retirement pay and company-paid health insurance during employees' retirement years should also be recorded as an additional cost and liability when the employees are working and earning these benefits.
Both the payroll taxes withheld from employees' pay and the payroll taxes that are an additional cost of the employer are reported as current liabilities until they are remitted to the federal and state governments and other parties.
Featured Review
"My current position is Accounting Associate. I recently graduated with a Masters of Accounting, and have roughly 8 months of accounting experience. I became a PRO user to use all the features of AccountingCoach in order to be better at journal entries for entry-level accounting positions. I loved that the materials were condensed and extremely easy to read, understand, and implement into my studies for tests and for my current position. I have benefited from the program by being more confident with adjusting entries, statements, journal entries, cash flow statements, as well as understanding the language of business." - Brittany D.
Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials
Read all 2,645 reviewsWe now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping: