First, let’s talk about posting payroll. You can post all your payroll taxes into the balance sheet liability account called Accrued Payroll Taxes (2300), but if you manage a sizeable payroll, you may prefer to set up individual accounts for each type of tax and benefit. These individual accounts include the following:

You may also want to set up additional expense accounts rather than post all payroll taxes to just the Payroll Taxes (5900) account. Some states also have state-sponsored disability insurance. If your state does, you would need to add accounts for that as well.

We made provisions for an employee’s insurance expense account when we set up the chart of accounts, but if you decide to offer other benefits such as retirement, you need to set up expense accounts to track those benefit costs as well.

For example, take a look at this format for the entry to post payroll.

If you were to decide to track accrued payroll taxes within individual accounts for each payroll type, then you would post the amount to each accrual account individually, and the list of accounts would be much longer. Small businesses with few employees usually have only one balance sheet account for accruing payroll taxes, but as the business grows, more accounts may be added to track each type of payroll tax separately.

Note that we posted a debit to the expense account Salaries and Wages, which increases the balance in that account. Expense accounts carry debit balances, which are subtracted from income accounts (which usually have credit balances) when you prepare the profit and loss (P&L) statement. We posted credits to the accrued accounts in the liability section of the balance sheet, which increase the balances of those accounts. The credit posted to the Cash in Checking account decreases the balance in this asset account.

You should also post any employer expenses related to payroll as well; such an entry uses the following format.

Note that we post to the expense accounts using a debit, which increases those balances. The amounts related to the liability accounts are posted as credits, which increases those accounts as well. Basically you are recording the tax and insurance expenses related to that payroll period even though you won’t pay these expenses until they are due. Accrued insurance payments are posted to the Accounts Payable account or to individual payable accounts for each insurance company.

In addition to posting the payroll totals to the affected general ledger accounts, you also need to set up individual records for each employee and post specific employee information on those records. You should set up an employee payroll record card for each employee that includes the following information:

Most of this information is entered when the employee is hired and does not have to be updated with each payroll. Adjustments are made either by employee request (such as a decision to change W-4 withholding or benefits) or manager request (such as pay rate change or job classification change). Other changes are made yearly, such as a cost-of-living increase or benefits change.

You should also keep a payroll ledger for each employee that lists the details of each employee’s paycheck at the end of each pay period. This detail not only includes pay information, but also includes hours worked and tracks hours used for vacation days, holidays, sick days, and personal leave. In most companies, the payroll is used to manage benefits related to days off and to track how many days each employee has left to take with pay. If all paid benefit days are used and the employee still needs time off, the employee has to take unpaid leave. You need to track the unpaid leave as well and indicate salary reductions.