Salaries and wages paid to EMPLOYEES. A salary is a fixed monthly or yearly amount; a wage is a rate per hour. Fees paid to outside contractors (a lawyer, a consultant) are not payroll and carry none of the payroll taxes.

The three numbers of every payroll?

Gross earnings (what you earned) − Deductions (what was taken out) = Net pay (what you take home).

How are gross earnings computed for an hourly employee?

Regular hours × regular rate + overtime hours × overtime rate. Federal law requires 1½ times the regular rate for hours over 40 in a week.

Mandatory vs. voluntary payroll deductions?

Mandatory (required by law): FICA (Social Security + Medicare), federal income tax, state income tax. Voluntary (employee's choice): retirement plan, health insurance, union dues, charitable contributions.

What is FICA, and what are the 2026 rates?

Two taxes on one line. Social Security 6.2% on the first $184,500 of 2026 earnings (the wage base); Medicare 1.45% on ALL earnings, no ceiling. Together 7.65% for most employees.

Are payroll deductions an expense of the company?

No. The company is only the middleman: it holds the employee's money and forwards it to the government or the plan. Money held for someone else is a LIABILITY (…Taxes Payable, …Contributions Payable).

What determines federal income tax withholding?

Gross earnings and the information on the employee's Form W-4 (filing status, dependents, other adjustments); the employer reads the amount from IRS withholding tables.

What is a payroll register?

The record of one pay period: for every employee — hours, gross earnings, each deduction, and net pay — with column totals that become the payroll journal entry.

Entry 1 — recording the payroll?

Dr Salaries and Wages Expense (gross). Cr one payable for each deduction (Social Security Taxes Payable, Medicare Taxes Payable, Federal Income Taxes Payable, State Income Taxes Payable, Health Insurance Payable…). Cr Salaries and Wages Payable (net pay).

Entry 2 — paying the employees?

Dr Salaries and Wages Payable (net) / Cr Cash. Paying what you already owe is never a new expense.

Entry 3 — the employer's payroll taxes?

Dr Payroll Tax Expense; Cr Social Security Taxes Payable (6.2% match), Cr Medicare Taxes Payable (1.45% match), Cr Federal Unemployment Taxes Payable (FUTA), Cr State Unemployment Taxes Payable (SUTA). These are the employer's own cost, on top of gross wages.

FUTA and SUTA — rates and ceilings?

FUTA is 6.0% less a credit of up to 5.4% for paying the state = 0.6%, on the first $7,000 paid to each employee in the year. SUTA is the state's own rate (usually about 5.4%) on its own wage base. Both are EMPLOYER taxes — nothing is withheld from the employee.

Why does a company track each employee's year-to-date earnings?

Because of the ceilings: Social Security stops at $184,500 (2026) and FUTA/SUTA stop at $7,000. Once an employee passes a ceiling, that tax stops for the rest of the year.

The Wage and Tax Statement the employer gives each employee by January 31: gross earnings, federal and state income tax withheld, Social Security and Medicare wages and tax withheld for the year.

The four jobs that keep payroll honest (internal control)?

Hiring employees, timekeeping, preparing the payroll, and paying the payroll — each handled by a different person or department so no one person controls the whole cycle.

How is paid vacation recorded?

In the month it is EARNED, not the month it is taken: Dr Vacation Benefits Expense / Cr Vacation Benefits Payable (days earned × daily rate). When the days are taken: Dr Vacation Benefits Payable / Cr Cash.

Defined-contribution plan — the entry?

The company only promises what it pays in (e.g., 4% of gross wages). Pension Expense = the contribution: Dr Pension Expense / Cr Cash (or Cr Pension Liability if not yet sent). Investment risk is the employee's.

Defined-benefit plan — the entry?

The company promises a monthly cheque for life. Expense = the actuary's cost for the year; Cr Cash for what was funded; the unfunded difference is Cr Pension Liability. Investment and longevity risk stay with the company.

Postretirement benefits (retiree healthcare)?

Recorded as the employees earn them: Dr Postretirement Benefits Expense / Cr Postretirement Benefits Liability for the year's estimated cost. Usually unfunded, and long-term on the balance sheet.

Employee or independent contractor?

An employee works under the company's direction and is on the payroll — the company withholds taxes and pays payroll taxes. An independent contractor (a lawyer, a consultant, a plumber) bills a fee; nothing is withheld and no payroll taxes apply.

What does a payroll REALLY cost the employer?

More than the wages. Total cost = gross salaries and wages + the employer's payroll taxes (FICA match, FUTA, SUTA) + fringe benefits (paid vacation, pension contributions, postretirement benefits).

Where do payroll liabilities sit on the balance sheet?

Salaries and Wages Payable and every …Taxes Payable / …Contributions Payable are current liabilities — they are remitted within weeks. Pension Liability and Postretirement Benefits Liability are usually long-term.

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Accounting 2 · Chapter 11 · Free

Chapter 11 — Payroll & Pensions

Gross pay to net pay, employee withholdings, employer payroll taxes, and pension plans.

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What you'll learn

Record payroll journal entries from gross pay through net pay
Compute and record employer payroll taxes — FICA, FUTA and SUTA
Distinguish employee withholdings from employer payroll tax expense
Explain the difference between defined benefit and defined contribution pension plans

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Part 1 — Payroll Journal Entries: Gross Pay, FICA, FUTA & SUTA

Part 2 — Defined Benefit vs Defined Contribution Pension Plans

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Chapter 11 — Payroll & Pensions

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