Payroll
From gross to net
Gross pay is hours times rate plus overtime premium, bonuses, and commissions. Employee withholdings include federal income tax, state and local income tax, FICA (Social Security with its annual wage base, plus Medicare with an additional high-earner rate), and voluntary deductions such as insurance, retirement, and garnishments. Net pay equals gross minus all employee deductions. The deductions are liabilities, not expenses - the wage expense is the gross amount.
Employer taxes
On top of gross, the employer matches FICA and pays FUTA (federal unemployment, on the first $7,000 of each employee's wages, net of the state credit) and SUTA (state rate and base vary by state). These are recorded as Payroll Tax Expense with separate payable accounts.
Traps
- Treating net pay as the wage expense; the expense is gross.
- Recording employee withholding as a tax expense rather than a liability.
- Forgetting that employer FICA is an extra cost above gross wages.
- Ignoring wage base ceilings on Social Security, FUTA, and SUTA.
- Missing that advances to employees are receivables recovered through later deductions.
Worked example
Gross $2,000; employee FICA 7.65% = $153; federal withholding $250; net = $1,597. Debit Wages Expense $2,000; credit FICA Payable $153, Federal Tax Payable $250, Cash $1,597. The employer then debits Payroll Tax Expense for its FICA match plus FUTA and SUTA.
Rule of thumb: total payroll cost = gross wages + employer taxes + employer-paid benefits.