Payroll Accounting With Examples and Entries

Payroll accounting is the process of calculating and processing the salaries and wages of a company’s employees. The amount a person earns will usually be calculated by multiplying their hourly rate by the number of hours worked to get a gross wage. If the employee is paid a monthly salary, this will usually be a fixed annual rate divided by 12. There may also be additional payments to add by way of bonuses, commissions, overtime, outstanding annual leave and any other gross income that is subject to income tax.

Payroll Accounting

Deductions made from the gross figure paid will include state and federal income tax, social security and medicare taxes, healthcare insurance, pension payments, compensation insurance and any other voluntary contributions. All these deductions can amount to a considerable proportion of an employee’s salary but in most cases are statutory deductions so there is no way to avoid them.

Large companies will have a sizeable payroll accounting department to prepare, process and pay the wages of their workers. In almost all cases, payroll accounting is now performed using accounting payroll software that makes the job of computing the correct net payments, more or less automated. The software will be updated with current parameters and thresholds that will calculate each person’s particular tax deductions at the press of a button.

It will produce the reports that are required to be submitted to the tax revenue services, generate payslips and upload a payment file to online banking ready to be transferred to employee’s accounts. Payments are typically made on the same day every week or month depending on the payment cycle. It’s different from Forensic Accountants.

Why Is Payroll Accounting Important

Wages and salaries are a substantial cost in most business organisations and it is extremely important that the payroll accounting function correctly accounts for the payments it makes to its employees. There can be draconian penalties applied if the revenue service discovers that taxes have either been incorrectly deducted, or not taken at all.

Any income that a company pays to an employee with the exception of refunding a business expense, relocation expenses and such like, is subject to one form of taxation or another. This tax is remitted to the state and federal revenue service and is a liability until such time as it is paid over. This is usually paid on a monthly basis and any additional amounts may be due once the year-end payroll has been reconciled.

A payroll accountant will more than likely require some kind of accounting certificate. Payroll accounting is a complex subject but represents an excellent career choice for someone wishing to specialise in a particular area of accounting.