An accrued payroll journal entry recognizes wages, employer payroll taxes, and benefits your employees have earned by the end of an accounting period but haven’t been paid for yet. The entry debits payroll expense and credits an accrued payroll liability for the same amount, putting the cost on the income statement in the period the work happened and parking the unpaid obligation on the balance sheet until the next payroll clears it.
Under Generally Accepted Accounting Principles, expenses must be recorded in the same period as the revenue they helped produce. If your team worked the last week of the month generating that month’s revenue, their wages belong on that month’s income statement even when payday falls in the next month. Skip the accrual and profits look better than they were, current liabilities look smaller than they are, and auditors specifically look for the gap.
What Goes into the Accrual Amount
Start with two dates: the last day employees were paid and the last day of your accounting period. The working days between them are the accrual window. Every dollar of compensation earned during that window has to be captured.
Wages and Overtime
For salaried employees, divide annual compensation by the number of working days in the year (typically 260 or 261) to get a daily rate, then multiply by the number of accrual-window workdays. For hourly workers, tally each person’s hours during the window and multiply by their rate.
Overtime earned but not yet paid has to be included. Under the Fair Labor Standards Act, all overtime an employer orders, approves, or knowingly permits must be compensated, and the premium is the regular rate multiplied by 1.5 for hours beyond 40 in a workweek.1U.S. Office of Personnel Management. How to Compute FLSA Overtime Pay If any part of an overtime workweek falls inside the accrual window, that overtime cost belongs in the accrual.
The Employer Payroll Tax Burden
Gross wages don’t tell the full story. The employer’s share of payroll taxes sits on top of every dollar of wages you’re accruing.
- Social Security is 6.2% on wages up to the 2026 wage base of $184,500. Once an employee’s year-to-date earnings pass that cap, no more Social Security tax accrues for them.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide3Social Security Administration. Contribution and Benefit Base
- Medicare is 1.45% on all wages, no cap. The 0.9% Additional Medicare Tax on wages above $200,000 falls entirely on the employee and adds nothing to the employer accrual.4Office of the Law Revision Counsel. 26 USC 3111 – Rates of Tax
- FUTA applies to the first $7,000 of each employee’s annual wages. The statutory rate is 6.0%, but employers in states with no outstanding federal unemployment loans get a 5.4% credit, so the effective rate is 0.6%. By December, most employees are already past $7,000 year-to-date, so a year-end FUTA accrual is often zero.5U.S. Department of Labor. FUTA Credit Reductions
- SUTA also has a capped wage base, but both the cap and the rate vary by state and by your company’s claims history. The same year-to-date logic applies: employees already past the state cap don’t generate any more SUTA accrual.6U.S. Department of Labor. Unemployment Insurance Tax Topic
Employer-Paid Benefits
Benefits that accrue with wages belong in the calculation too. The two big ones are the employer 401(k) match and the employer share of health insurance premiums. For a 401(k) match, estimate the amount based on employee contributions during the accrual window. Health premiums are usually fixed monthly figures, so prorate them for the days in the accrual period. Add wages, employer taxes, and benefits together to get the total accrual figure you’ll book.
Recording the Accrual at Period End
Say your calculation lands at $15,000 total. On the last day of the period, the entry is:
- Debit Payroll Expense $15,000
- Credit Accrued Payroll Liability $15,000
The debit puts the cost on the income statement in the correct period. The credit creates a current liability on the balance sheet showing what you owe but haven’t paid. Accrued Payroll is classified as current because the next payroll run clears it within days or weeks.
If you want more detail in the general ledger, split the debit into Wage Expense, Employer Payroll Tax Expense, and Benefits Expense, and split the credit into Accrued Wages Payable, Employer FICA Payable, and Accrued Benefits Payable. The two sides still total $15,000. A single-line entry is faster and works fine for smaller payrolls.
Clearing the Accrual in the Next Period
Two methods get you to the same result. Pick one and stay consistent.
The Reversing Method
On the first day of the new period, reverse the accrual:
- Debit Accrued Payroll Liability $15,000
- Credit Payroll Expense $15,000
That zeros out the liability and leaves a temporary negative balance in Payroll Expense. When the real payroll runs a few days later, say $40,000 for a full pay period, record it normally: debit Payroll Expense $40,000, credit the various withholding liability accounts for amounts withheld, and credit Cash for the net paid to employees. The $15,000 credit already sitting in Payroll Expense from the reversal means the new period nets only $25,000 of expense, which is the portion of the pay period that actually belongs to the new period. The math corrects itself, which is why most accountants prefer this approach.
The Non-Reversing Method
Leave the liability on the books into the new period and true it up when payroll runs. For the same $40,000 payroll, you’d debit Accrued Payroll Liability $15,000 to eliminate it, debit Payroll Expense $25,000 for the new-period portion, credit the withholding liability accounts, and credit Cash for the net payout. Same end result, but you have to split every payroll manually between the accrued piece and the current-period piece. It works if you don’t have automated reversals, but it takes more attention at each run.
Bonuses, Commissions, and PTO
The regular payroll accrual isn’t the only one you’ll book. Three categories get missed most often because they’re lumpier.
Bonuses
If employees earned a bonus during the period but get paid in the next one, debit Bonus Expense and credit Accrued Bonus Payable. The amount has to be fixed and determinable by period end. A bonus tied to annual profit qualifies once the books close. A bonus contingent on the employee still being employed at the payment date may not, because the liability isn’t fully established until that condition is met.
Commissions
Sales commissions follow the matching principle the same way wages do. Deals closed in December produce a December commission expense even if the check goes out in January. Calculate the amount under whatever structure applies and record a debit to Commission Expense and a credit to Commissions Payable.
Vacation and PTO
Under GAAP, you accrue a liability for compensated absences when four conditions all hold: the obligation is tied to services already performed, the time off either vests or accumulates period to period, payment is probable, and the amount can be reasonably estimated. If your PTO policy rolls unused days forward or pays them out at termination, it almost certainly meets all four. Federal law doesn’t require employers to provide vacation pay or to pay out unused time at termination,7U.S. Department of Labor. Vacations but many state laws do, so the liability is real in most workplaces. The entry: debit Vacation Expense, credit Accrued Vacation Payable for the dollar value of hours earned but not yet used.
Deducting Accrued Payroll on Your Taxes
Booking the accrual is a GAAP question. Deducting it is a tax question, and the two don’t automatically match. Confusing them is expensive.
If your business is on the cash method for tax purposes, accrual entries don’t affect the return at all. You deduct wages and bonuses in the year you actually pay them.
Accrual-basis taxpayers get more room, with conditions. To deduct an expense in the year it accrues, you have to pass the IRS “all events test”: the obligation is established, the amount is determinable with reasonable accuracy, and economic performance has occurred.8Office of the Law Revision Counsel. 26 USC 461 – General Rule for Taxable Year of Deduction For wages, economic performance happens as employees do the work, so the first two conditions are what usually matter. Even when economic performance isn’t quite there at year-end, a recurring item exception lets you deduct in the current year if the item is recurring and economic performance occurs within 8½ months after the close of the tax year.9eCFR. 26 CFR 1.461-5 – Recurring Item Exception Regular payroll accrued at December 31 and paid in early January clears that easily.
Accrued vacation pay has its own rule. An accrual-basis employer can deduct it in the year earned if the amount is vested and paid within 2½ months after year-end; pay it later and the deduction moves to the year of actual payment.10Internal Revenue Service. Publication 538 Accounting Periods and Methods Year-end bonuses work the same way: fixed and determinable by December 31, and paid within 2½ months. Bonuses to related parties, such as a shareholder owning more than 50% of a corporation, follow stricter rules and generally can’t be deducted until the year paid, no matter when they accrued.
Where It Shows Up on the Financials
One entry, three statements. Payroll Expense on the income statement rises in the period the work happened, which lowers net income for that period. Accrued Payroll appears on the balance sheet as a current liability, which lenders and investors read as part of your short-term obligations. On a cash flow statement prepared with the indirect method, the increase in Accrued Payroll is added back to net income in operating activities because you recognized an expense that hasn’t hit cash yet. When the accrual reverses and cash actually goes out in the next period, the liability decreases and the adjustment runs the other direction.