How to use the payroll journal entry builder
- Enter the gross wages from your payroll report for the period.
- Enter the income tax withheld, the employee contributions withheld and any other deductions, exactly as the report shows them.
- Enter the employer payroll taxes, which are a cost you owe on top of the wages.
- Choose whether net pay is paid from cash or still owed, then read the journal entry and its totals.
Formula
Debit wages expense = gross wages. Debit payroll tax expense = employer payroll taxes
Credit a payable for each amount withheld and for the employer taxes
Net pay = gross wages - income tax - employee contributions - other deductions, credited to cash or wages payable
Debits equal credits because the net pay is whatever is left of the gross wages after the deductions.
A payroll of $42,000 in gross wages
With $4,620 of income tax, $3,213 of employee contributions and $850 of other deductions withheld, the total withheld is $8,683 and the net pay is $33,317. The employer taxes are $3,213.
The entry debits wages expense $42,000 and payroll tax expense $3,213, a total of $45,213. It credits income tax withheld payable $4,620, employee contributions payable $3,213, other deductions payable $850, employer payroll taxes payable $3,213 and cash $33,317, which also adds to $45,213. Choosing Owed as wages payable puts the $33,317 in wages payable instead of cash.
Why the entry has so many credits
Wages are not all paid to the employee. Part is held back for the tax authority and for other parties, and each of those amounts is a debt until you pay it. Recording each in its own payable account keeps them apart, so that when you remit the income tax you clear only that account. The employer share of payroll taxes is a separate cost, so it has its own expense and its own payable.
This tool takes every figure from your payroll report. It does not work out any tax and has no rates inside, because rates and the way contributions are shared change by place and by year. If your report shows other lines, such as benefits paid by the employer, add them to the other deductions or record them in a second entry.
Posting and checking
Post the entry on the date the payroll is run, or on the last day of the period if wages are earned before they are paid. When the cash goes out later, a second entry moves the money from the payables to the bank. The Journal Entry Generator can write that follow-up entry, and the Chart of Accounts Template lists accounts you may need. For planning, the Payroll Deduction per Period Calculator spreads a yearly deduction over pay periods, and the Payroll Accrual Split Calculator splits a payroll that crosses a month end.
Assumptions and limits
- All amounts come from your payroll report. No rate is applied by the tool.
- The employer taxes are recorded as an expense and a payable of the same amount.
- Account names are examples. Use the names in your own chart of accounts.
- The figures shown are examples and the tool does not give accounting or tax advice.
Frequently asked questions
Why does the tool refuse deductions that are too large?
Because the net pay would be negative. The deductions must be no more than the gross wages for the entry to make sense.
Where do benefit costs paid by the employer go?
Enter them in a second entry, or add them to the employer payroll taxes field if you want them in one line. The tool does not separate them.
Does the entry include the cash paid to the tax authority?
No. It records what you owe. When you pay, debit the payable accounts and credit cash.
Can I use this for a single employee?
Yes. Enter that employee's figures from the pay stub, or total a whole payroll run if you prefer one entry for all.