Payroll is the one topic where the accounting is easy but the numbers come from somewhere else: tax tables, benefit elections and statutory rates. US exam questions on payroll always come down to two journal entries, one for what the employees earn and one for what the employer owes on top. Most mistakes come from mixing the two. This post walks through a full payroll, from gross pay to paying the IRS.
Two Payrolls in One
Employee side: the employee earns gross pay. The employer withholds part of it (income taxes, the employee's FICA, benefit contributions) and pays the rest as net pay. Withholdings cost the employer nothing extra. The employer holds that money for someone else, so each one is a liability until it is paid over.
Employer side: the employer pays its own taxes on top of gross pay: matching FICA, federal unemployment tax (FUTA) and state unemployment tax (SUTA), plus any employer share of benefits. These are extra costs and are recorded as expenses.
The Rates You Need
| Tax | Paid by | Rate |
|---|---|---|
| Social Security (FICA-OASDI) | Employee and employer | 6.2% each, up to an annual wage base that is reset every year |
| Medicare (FICA-HI) | Employee and employer | 1.45% each, no wage cap (employees also pay an extra 0.9% on wages above $200,000) |
| Federal income tax | Employee (withheld) | From the employee's W-4 and IRS tables, so exam questions give it to you |
| FUTA | Employer only | Effectively 0.6% on the first $7,000 per employee per year, after the state credit |
| SUTA | Employer only (in most states) | Varies by state and employer; questions give the rate |
Check the current Social Security wage base when you work real payroll; it changes every January. In an exam, use whatever the question gives you.
Worked Example: Bayview Dental, Biweekly Payroll
Gross salaries for the period are $20,000. It is early in the year, so no employee has reached any wage cap. Withholdings: federal income tax $2,400; state income tax $800; employee health insurance premiums $600; employee 401(k) contributions $1,000. Bayview's SUTA rate is 2.7%.
Step 1: Employee FICA and net pay
Social Security: $20,000 × 6.2% = $1,240
Medicare: $20,000 × 1.45% = $290
Net pay = 20,000 − 2,400 − 800 − 1,240 − 290 − 600 − 1,000 = $13,670
Entry 1: Record the payroll
| Account | Debit | Credit |
|---|---|---|
| Salaries and Wages Expense | 20,000 | |
| Federal Income Tax Payable | 2,400 | |
| State Income Tax Payable | 800 | |
| FICA – Social Security Payable | 1,240 | |
| FICA – Medicare Payable | 290 | |
| Health Insurance Payable | 600 | |
| 401(k) Contributions Payable | 1,000 | |
| Salaries and Wages Payable | 13,670 |
The expense is the full gross $20,000, not the net. The withholdings are part of what the employees earned; the employer simply pays that part to someone else on their behalf.
Entry 2: Record the employer's payroll taxes
Employer Social Security match: $1,240
Employer Medicare match: $290
FUTA: $20,000 × 0.6% = $120
SUTA: $20,000 × 2.7% = $540
Total = $2,190
| Account | Debit | Credit |
|---|---|---|
| Payroll Tax Expense | 2,190 | |
| FICA – Social Security Payable | 1,240 | |
| FICA – Medicare Payable | 290 | |
| Federal Unemployment Tax Payable | 120 | |
| State Unemployment Tax Payable | 540 |
Entry 3: Record employer-paid benefits
Bayview also pays $1,800 toward employee health insurance and matches 401(k) contributions at 50% ($500):
| Account | Debit | Credit |
|---|---|---|
| Employee Benefits Expense | 2,300 | |
| Health Insurance Payable | 1,800 | |
| 401(k) Contributions Payable | 500 |
Entry 4: Pay the employees
| Account | Debit | Credit |
|---|---|---|
| Salaries and Wages Payable | 13,670 | |
| Cash | 13,670 |
Entry 5: Remit federal taxes to the IRS
Federal income tax withheld, plus both halves of FICA, go to the IRS together:
| Account | Debit | Credit |
|---|---|---|
| Federal Income Tax Payable | 2,400 | |
| FICA – Social Security Payable | 2,480 | |
| FICA – Medicare Payable | 580 | |
| Cash | 5,460 |
The other liabilities are cleared the same way when each is paid: state tax to the state, premiums to the insurer, contributions to the 401(k) plan, and FUTA and SUTA (usually quarterly).
What This Payroll Really Cost
Gross pay $20,000 + payroll taxes $2,190 + benefits $2,300 = $24,490. The employees took home $13,670. The gap between those two figures is a common follow-up question. Total employer cost is often 20–30% more than the salary line alone.
When the Pay Period Crosses Year-End
If the year ends partway through a pay period, the wages earned but not yet paid are accrued with an adjusting entry: Dr Salaries and Wages Expense, Cr Salaries and Wages Payable, for the days worked. That is one of the five types in our adjusting entries guide. Many questions also expect the matching employer payroll taxes to be accrued.
Common payroll entry mistakes
- Debiting expense for net pay. Salaries expense is always gross pay. Withholdings are liabilities, not reductions in expense.
- Withholding FUTA or SUTA from employees. Unemployment taxes are an employer cost (except in a few states). They belong in entry 2, never entry 1.
- Counting FICA once. Employee FICA is withheld; the employer pays an equal amount on top. The IRS receives both.
- Ignoring the caps. FUTA stops after $7,000 per employee, and Social Security stops at the annual wage base. Late-year questions often have employees who have passed a cap. Apply the rate only to wages below it.
- Treating voluntary deductions as expenses. An employee's own 401(k) contribution or premium share is a liability. Only the employer's share is an expense.
Payroll questions reward a fixed routine: gross, withholdings, net, then the employer's share. Practice it on Accountely's payroll accounting challenges, which grade every withholding and liability line. For general journal practice, try the journal entry challenges.
Frequently Asked Questions
What are the journal entries for payroll?
Record the payroll (debit Salaries Expense for gross pay, credit each withholding liability and Salaries Payable for net pay), record the employer's payroll taxes (debit Payroll Tax Expense, credit FICA, FUTA and SUTA payable), then record paying the employees and remitting the taxes.
Which payroll taxes does the employer pay?
The employer matches the employee's Social Security and Medicare (FICA) and pays federal and state unemployment taxes (FUTA and SUTA). Federal and state income tax is withheld from the employee, not paid by the employer.
Is salaries expense gross pay or net pay?
Gross pay. Amounts withheld from employees are liabilities the company owes to the government or other parties, not reductions in the expense.
What does a payroll really cost the employer?
Gross pay plus the employer's payroll taxes plus any employer-paid benefits, such as health insurance or retirement contributions. That total is always more than the gross salary.