How to record a payroll journal entry
Every payroll ends with a journal entry. The payroll register tells you what employees earned, what was taken out and what they received, and your job is to turn those totals into balanced debits and credits. This page works from a register, from example rates, and from a payroll that has not been paid yet, then adds the employer's own taxes.
Every rate on this page and in the exercises is an example rate for practice only. The rates are not current tax law, and nothing here is tax advice. Real withholding and payroll tax rules vary by country and region and change over time, so employers should check the rules that apply to them.
The payroll register is your source document
A payroll register is the summary sheet for one pay period. It has a row for each employee and a column for each part of their pay: gross wages, each amount withheld, and net pay. At the bottom are the totals. Bookkeepers almost never journalize payroll employee by employee. They record one entry from the totals row.
Three facts from the register drive the entry:
- Gross wages: everything the employees earned for the period. This is the cost of their work to the business.
- Amounts withheld: income tax, employee social insurance, retirement contributions and anything else taken out of pay. The business keeps this money for a short time and then sends it to whoever it is owed to.
- Net pay: gross wages minus everything withheld. This is what employees take home.
One equation ties them together, and it is the check for every payroll entry you will ever record:
Gross wages = total withheld + net pay
Which accounts move, and why
The exercises use a small set of accounts. Here is what each one means in a payroll entry:
- Wages Expense (debit) always takes the full gross wages. The business used up a period of work worth that much, whatever happens to the cash.
- Withholdings Payable (credit) takes the total of everything withheld. It is a liability because the money belongs to a tax agency or a retirement plan, not to the business.
- Cash (credit) takes the net pay, if employees are paid the same day.
- Wages Payable (credit) takes the net pay instead, if the payroll is recorded before employees are paid.
- Payroll Tax Expense and Payroll Taxes Payable hold the employer's own taxes, which are a separate entry covered below.
If you are still building confidence with which side each account goes on, the basics are in payroll journal entries. This page goes further: working from a full register, calculating withholdings at example rates, and recording a payroll before payday.
Worked example 1: recording payroll from the register
Harbor Bakery's payroll register for the week shows these totals:
| Register column | Total |
|---|---|
| Gross wages | 39,169.69 |
| Pre-tax retirement contributions | 1,566.79 |
| Income tax withheld | 4,512.35 |
| Employee social insurance withheld | 2,350.18 |
The net pay was paid to employees in cash today.
Step 1: add up everything withheld
$1,566.79 + $4,512.35 + $2,350.18 = $8,429.32. The retirement contributions count. They are not a tax, but they came out of employees' pay and are owed to the retirement plan, so they are a withholding like any other. The fact that they are pre-tax changes how the income tax was worked out, not how the entry looks. For more on that difference, see pre-tax vs post-tax deductions.
Step 2: work out net pay
$39,169.69 − $8,429.32 = $30,740.37. This is the cash that left the bank today.
Step 3: record the entry
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | 39,169.69 | |
| Withholdings Payable | 8,429.32 | |
| Cash | 30,740.37 | |
| Total | 39,169.69 | 39,169.69 |
Some businesses split Withholdings Payable into one account per agency or plan. That is a good habit in real books, but the logic does not change: each piece is a credit to a liability. The exercises use one Withholdings Payable account for the total.
Worked example 2: working out withholdings at example rates
Sometimes you get the gross wages and the rates instead of a finished register. Harbor Bakery's employees again earned $39,169.69. At example rates, it withholds income tax of 12% of gross wages and employee social insurance of 6% of gross wages, each rounded to the cent.
- Income tax: $39,169.69 × 12% = $4,700.3628, which rounds to $4,700.36.
- Employee social insurance: $39,169.69 × 6% = $2,350.1814, which rounds to $2,350.18.
- Total withheld: $4,700.36 + $2,350.18 = $7,050.54.
- Net pay: $39,169.69 − $7,050.54 = $32,119.15.
Round each amount on its own, then add. Rounding a combined 18% gives the same answer here, but it will not always, and the payroll register rounds each column separately.
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | 39,169.69 | |
| Withholdings Payable | 7,050.54 | |
| Cash | 32,119.15 | |
| Total | 39,169.69 | 39,169.69 |
If you want to build these calculations in a spreadsheet for a whole staff, see payroll calculations in Excel.
Worked example 3: payroll recorded before payday
A pay period often ends on one day and the money goes out a day or two later. The business still records the payroll on the last day of the period, because that is when the wages were earned.
Harbor Bakery's employees earned $39,169.69 for the pay period that ended today. $8,617.33 is withheld for taxes and benefits. The net pay will be paid on the next business day.
Nothing has been paid yet, so Cash does not move. The net pay is owed to the employees until payday, which makes it a liability: Wages Payable. Net pay is $39,169.69 − $8,617.33 = $30,552.36.
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | 39,169.69 | |
| Withholdings Payable | 8,617.33 | |
| Wages Payable | 30,552.36 | |
| Total | 39,169.69 | 39,169.69 |
Notice the two liabilities. Wages Payable is owed to the employees. Withholdings Payable is owed to others. On payday the business clears Wages Payable with a debit and credits Cash; that payment and the later payment of the withholdings are covered in paying payroll liabilities.
Worked example 4: the employer's payroll taxes
Withholdings come out of the employees' pay. The employer also owes taxes of its own, on top of the wages. These are a second entry, recorded at the same time as the payroll.
Harbor Bakery's gross wages for the week were $39,169.69, and none of its employees has reached any wage base (in the example, a yearly earnings limit after which a tax stops applying). At example rates, it owes employer social insurance of 6% and unemployment insurance of 0.8% of gross wages, to be paid next month.
- Employer social insurance: $39,169.69 × 6% = $2,350.18.
- Unemployment insurance: $39,169.69 × 0.8% = $313.3575, which rounds to $313.36.
- Total employer taxes: $2,663.54.
| Account | Debit | Credit |
|---|---|---|
| Payroll Tax Expense | 2,663.54 | |
| Payroll Taxes Payable | 2,663.54 |
The employer social insurance is the same $2,350.18 as the amount withheld from employees in example 2. That is because both used a 6% example rate on the same wages. They are still two different obligations: one is the employees' money held back from their pay, the other is the employer's own cost. Keep them in separate accounts. The spreadsheet side of this calculation, including wage bases, is in employer payroll taxes in Excel.
The full cost of a payroll
Put the two entries side by side and you see what the week of work really cost Harbor Bakery. Wages Expense holds $39,169.69 and Payroll Tax Expense holds $2,663.54, so the total cost is $41,833.23. The withholdings are not part of that extra cost: they were already inside the gross wages. This is why a business budgets for more than gross pay when it hires, and why Payroll Tax Expense sits next to Wages Expense on the income statement.
Common mistakes
The exercises check for each of these and tell you which one you made.
Recording Wages Expense at net pay
Dr Wages Expense $30,740.37, Cr Cash $30,740.37 matches the bank, but it drops $8,429.32 of cost and leaves no liability for the withholdings. Wages Expense is always gross.
Paying out the retirement contributions in cash
Leaving the $1,566.79 of retirement contributions out of the withholdings gives Withholdings Payable $6,862.53 and Cash $32,307.16. The entry balances, but it says employees took the contributions home. They did not; the money is owed to the retirement plan.
Crediting all of the gross pay to Cash
Dr Wages Expense $39,169.69, Cr Cash $39,169.69 says the business paid everything and owes nothing. Employees received $32,119.15. The $7,050.54 withheld still has to be paid over.
Crediting Cash before payday
In example 3 the employees are paid tomorrow. Crediting Cash today says the money has already left. Credit Wages Payable for the net pay instead.
Putting the gross pay in Wages Payable
Cr Wages Payable $39,169.69 says employees are owed their gross pay. They are owed only their net pay of $30,552.36. The $8,617.33 withheld is owed to others and goes to Withholdings Payable.
Crediting employer taxes to Withholdings Payable
The amount is right but the account is wrong. Withholdings Payable is for money taken from employees. The employer's own taxes go to Payroll Taxes Payable.
Leaving out a tax
Recording only the employer social insurance gives $2,350.18 instead of $2,663.54. Work out each example tax separately, then add them all.
How to check your payroll entry
- Wages Expense equals gross wages.
- Withholdings Payable equals the sum of every amount withheld, including retirement contributions.
- Cash or Wages Payable equals net pay, and never both.
- Withholdings plus net pay equals gross wages.
- The employer's taxes are in their own entry, with no cash and no Withholdings Payable.
Wages earned at the end of a month but not paid until the next one need an adjusting entry instead; see accrued payroll journal entries.
Frequently asked questions
How do you record a payroll journal entry?
Debit Wages Expense for gross wages, credit Withholdings Payable for everything withheld, and credit Cash for net pay. With gross wages of $39,169.69 and $8,429.32 withheld, Cash is credited $30,740.37.
Do retirement contributions go in Withholdings Payable?
Yes. They come out of employees' pay and are owed to the retirement plan until the business sends them, so they are a liability like any other withholding.
What if payroll is recorded before employees are paid?
Credit Wages Payable for the net pay instead of Cash. On payday, debit Wages Payable and credit Cash.
Are employer payroll taxes part of the payroll entry?
They are a separate entry recorded at the same time: debit Payroll Tax Expense and credit Payroll Taxes Payable. They are not taken from employees' pay.
Are the rates on this page real?
No. They are example rates for practice only, not current tax law and not tax advice. The skill is applying a given rate correctly and putting the result in the right account.