Disbursements for Payroll and Related Benefits

When an employee is paid for his or her services to a company, an entry must be made to record salary expense. If the gross amount of an employee’s salary was equal to the amount that would ultimately be paid out in cash, the accounting would be simple. An entry would be made to debit payroll expense and credit cash. For example, if an employee’s salary for the pay period was $1,000, the entry would be as follows:
                            DR Payroll Expense         1,000
                            CR Cash                                          1,000

However, the amounts paid to employees will never reflect the gross amount of salary expense, due to payroll taxes and other voluntary withholdings such as taxes, insurance premiums and 401(k) contributions. Amounts withheld from an employees’ paycheck, for their elective deductions and payroll taxes, are never an expense of the company; the amounts would be recorded as a liability when withheld and the liability relieved when paid. The payroll expense will still be recorded gross, however the amount paid out in cash is reduced by the amounts withheld for payroll and income taxes, insurance premiums, 401(k) contributions, or other voluntary withholdings. The difference between the gross payroll expense and the net cash paid out is recorded as a liability. For example, the entry might be made as follows:
                         DR Payroll Expense        1,000
                         CR Cash                                                  800
                         CR Payroll Taxes Payable                            100
                         CR Insurance Payable                                  60
                         CR 401(k) Payable                                      40                           

The employer is also responsible for paying a portion of certain payroll taxes, such as Social Security and Medicare, insurance premiums and/or making voluntary contributions to retirement plans. For the amounts to be paid by the employer (not withheld from the employee’s salary), an entry should be made to debit an expense account such as Social Security, Medicare or insurance expense, and to credit a liability account such as Social Security, Medicare or insurance payable. When the amounts are subsequently paid, you would debit the liability account and credit cash.

Depending on the number of employees in your organization will determine how you remit the withholdings.

Written by Ashley Parsons, staff auditor.