Payroll Journal Entry: Gross Pay, Withholding and Employer Tax

How do I record a payroll journal entry for one pay run?

A payroll journal entry for one pay run debits two expenses, gross wages and the employer's payroll taxes. It credits the bank for net pay and one liability account for each tax withheld or owed. Debits equal credits. Post it from the payroll register, the provider's report of each employee's gross pay, deductions and net pay for the run, not from the bank debit.

A payroll clearing account is a temporary holding account: net pay goes in when you post the run and out when the money leaves the bank, so it ends at zero.

Gross wages are everything the employee earned, so the tax taken out of their pay is not an added cost to the business. Only the employer's own taxes are. The IRS calls withheld income tax and the employee's Social Security and Medicare tax "trust fund taxes" because the employer holds them for the Treasury (Publication 15). That is why they sit in liability accounts and never in expense. If they are not paid over, the IRS can charge each responsible person who willfully fails to pay them, such as an officer or partner, 100% of the unpaid amount under section 6672 (Publication 15, section 11). The IRS generally has 3 years from April 15 of the year after the wages were paid, or the filing date if later, to assess it, and no limit while a return is unfiled (section 6501; the IRS's internal manual applies it in IRM 5.7.3). See the trust fund recovery penalty.

The entry is not simple when:

• Your provider's report, your bank and your books each show a different amount for the same run.
• A quarter's Form 941 does not agree with the W-2 totals or your books, the provider's report shows a deposit that your IRS account does not, or the IRS has sent a notice.
• Earlier months of payroll were never posted, or went in as one expense.
• Employees work in more than one state, because each state adds its own accounts.
• Pre-tax deductions, taxable benefits or an S corporation owner's health insurance make the register's gross pay differ from the wages on Form 941.
• You are an owner. A corporation's owner who works in the business is an employee, so the pay goes through this entry and distributions never do. Publication 15 lists payments to partners as exempt from withholding and payroll tax, and people in business for themselves are generally not employees, so a sole proprietor's or partner's own take is not run through payroll (Publication 15).

If any of the first three applies, posting the next run correctly will not settle the periods already past. Each one has to be traced from the register to your IRS account and the filings. The last section says where to go next.

Gather before you post: the payroll register for the run, the provider's tax liability report, the bank lines, and the Forms 941 and 940 filed so far.

Which payroll taxes come out of pay, and which does the employer owe on top?

Income tax, Social Security and Medicare come out of the employee's pay, and the employer matches the last two. Federal unemployment tax is the employer's alone, and each state sets its own unemployment tax.

The rates and wage limit are in Publication 15 and Topic 751. Social Security stops for an employee once their wages reach the limit, but Medicare continues all year. The FUTA credit is smaller if state tax is paid late or the state is a credit reduction state, and there is none on wages a state leaves out of its unemployment tax, such as corporate officers' pay in some states (Form 940 instructions).

Some family pay has fewer lines. A sole proprietor, or a partnership whose partners are all the child's parents, owes no Social Security or Medicare tax on a child's pay under age 18 and no FUTA on a child's pay under 21. A sole proprietor owes no FUTA on a spouse's pay. Income tax withholding still applies, and a corporation or any other partnership gets none of these breaks (Publication 15, section 3; hiring your children).

In Publication 15, "income tax" means federal income tax only, and it sends employers to their state or local tax department for state rules. State withholding, state unemployment and any local tax each get their own liability account, named as the provider's tax report names them. Some states also take a disability or paid-leave contribution out of employee pay (California, New York), and a few take part of the unemployment tax (Department of Labor). Anything taken out of pay is a liability, not employer expense. The entry changes by state.

Cash basis or accrual: which date do wages and payroll taxes go on?

The entry has the same lines on cash and accrual books. Only the date differs. Cash-basis books post the whole run, wages and employer tax, on the pay date. Accrual books post wages in the period the work was done (Publication 538).

These columns are the books. The return can differ: a cash-method return deducts expenses in the year paid, an accrual return generally deducts employment taxes when they are paid (the recurring-item exception can move that earlier, as accrued payroll at year end explains), and wages owed to a related person on the cash method, such as an owner, are deductible only when paid (Publication 538). Your preparer settles that difference at year end.

Withheld tax is a liability on cash books too. The deposit clock starts on the pay date, and Form 941 reports liability by the date wages were paid, not the date it accrued or was deposited (Form 941 instructions; Publication 15). Form W-2 wages follow the calendar year in which they are paid (W-2 instructions).

A pay period inside one month needs no accrual. For a period that crosses a month end or a year end, see wages earned in December and paid in January.

My payroll provider takes one amount from the bank. How do I split it?

Split the debit into net pay, tax impound and the provider's fee, using the provider's summary for the run, and match it to the register entry. Coding the whole debit to one payroll expense overstates wages, hides the employer tax and the fee, and leaves no liability to check against deposits.

If your provider sends its own entry to your books, open it and compare each line with the table at the top of this page. Look for tax coded to expense, the fee inside wages, and one bank credit for everything.

1. Get the summary for the run. It shows gross pay, each tax, net pay and the fee if the provider bills it with the run.
2. Post the entry from the table at the top of this page, crediting a payroll clearing account for net pay.
3. Split the bank line. Net pay clears the payroll clearing account. Each tax amount debits its own liability account. The fee goes to a payroll fees expense account, not to wages or payroll tax.
4. Check the split. The parts must add to the bank amount to the cent, and the payroll clearing account should be zero after every run.
5. Confirm the deposits in your own IRS account. The bank debit shows cash leaving, not the tax reaching the IRS. An employer generally stays responsible for deposits even when a provider makes them, and the IRS advises activating the Inquiry PIN the employer receives when a provider enrolls it in EFTPS, the federal deposit system, to monitor the account (Publication 15, section 16).

If the IRS account does not show what the provider's report says, see a provider that did not pay the taxes.

How do I record the tax deposits and the Form 941 and Form 940 payments?

A deposit clears liabilities and is never a second expense. Debit each liability account for what was deposited and credit the bank. The same entry records a balance paid with Form 941 or Form 940. If your provider takes the tax from your bank with each run and deposits it for you, the split above already cleared the liabilities in the books, so do not book the deposit again when the provider remits. You stay liable until that deposit reaches the IRS, so confirm it in your IRS account (Publication 15, section 16).

Employers over that lookback limit deposit semiweekly, and any employer must deposit by the next business day once a liability reaches $100,000. A monthly depositor who reaches it becomes a semiweekly depositor from the next day, for the rest of that year and the next (Publication 15, section 11). The entry is the same. The schedules and the small-balance payment with Form 941 are in running payroll yourself.

Federal deposits must be made electronically (Publication 15, section 11). The due dates above are in Publication 15 and the Form 941 and Form 940 instructions. Record each deposit with its date, amount and confirmation number. Penalties and interest on a late deposit go to a separate account so payroll tax expense still ties to the returns. For missed deposits, see behind on payroll taxes.

What should each payroll liability account show after a deposit?

Right after a deposit, a liability account should hold only the tax on pay dates the deposit did not cover. A monthly depositor's balance at month end is that month's tax, and it drops to zero when the deposit goes out.

If your provider takes the tax with every run, the split above clears the liabilities at once, so expect near-zero balances after each run. The check is then your IRS account, not the book balance. FUTA is the exception to a zero balance: a small amount can carry from quarter to quarter until it passes the threshold (Publication 15, section 14). A negative balance can mean more was deposited than posted, a run was left out, or a deposit was coded to the wrong account. For balances that will not clear, see payroll liabilities that won't clear.

How do I tie my books to the payroll register, Form 941 and the W-2 totals?

Each quarter the books' payroll totals should equal the register and Form 941. Each year the four Forms 941 should agree with the Form W-3 totals. The IRS matches them and may contact the employer when they differ (Form 941 instructions). An employer the IRS has told in writing to file Form 944 ties to that annual return instead, on its own line numbers.

The annual FUTA total should agree with Form 940: line 12 is the tax after adjustments and line 13 the amount deposited (Form 940 instructions).

At year end, compare the four Forms 941 with Form W-3, filed with the W-2s by February 1, 2027. Income tax withheld should match W-3 box 2, except income tax a third-party sick pay payer withheld, which is on the W-2s but not on Form 941 line 3. The wage lines should match boxes 3 and 5. The Social Security and Medicare tax on the four Forms 941 should be about twice W-3 boxes 4 and 6, because Form 941 includes the employer share. Keep the reconciliation, because the IRS or the SSA may contact you about a difference (W-2 instructions).

A gap the table does not explain may be a valid difference, a bookkeeping error (a run posted twice, wages in the wrong quarter) or a filing error (a deposit credited to the wrong quarter). Find out which before changing anything (W-2 instructions). It decides whether you correct entries, file an adjusted return (Form 941-X), or both (Form 941 instructions). Adjustments for an earlier year stay off the current year's W-2s and W-3. Do not plug the difference to make the books agree.

Which payroll records must I keep, and for how long?

Keep all employment tax records for at least four years. Publication 15 lists them, including the amounts and dates of all wage payments, each employee's identifying details and Form W-4, the dates, amounts and confirmation numbers of tax deposits, and copies of the returns filed.

Publication 583 counts the period from the date the tax is due or paid, whichever is later. The IRS recordkeeping page counts it from the filing of the fourth-quarter return. The later of the two is the safer count. Records behind some credits and state rules can require longer; see payroll records retention.

Example

These examples are illustrative. All figures are in US dollars.

One employee, one monthly pay run

An employee earns $10,000 gross for the month. Federal income tax withheld is $1,000. Social Security (6.2%) and Medicare (1.45%) withheld are $620 and $145, so net pay is $8,235. The employer owes the same $765 match.

Total payroll cost is $10,765 before unemployment taxes. The three liabilities total $2,530. A monthly depositor deposits that by the 15th of the next month, debiting the three liabilities and crediting the bank. Unemployment tax adds a debit to payroll tax expense and a credit to its own payable account. With the full state credit, FUTA is 0.6% of the first $7,000, so $42 per employee for the year.

The provider debits one lump amount

A provider debits $19,500 in one line. Its summary shows gross pay $18,000, income tax withheld $2,400, employee Social Security $1,116 and Medicare $261, the same employer match, and a fee of $123. Net pay is $14,223. Unemployment tax is not in this draw.

The register entry debits wages $18,000 and payroll tax expense $1,377. It credits payroll clearing $14,223, income tax withheld $2,400, Social Security payable $2,232 and Medicare payable $522. The bank line then splits like this:

Coded as one payroll expense instead, the books show wages of $19,500 against $18,000 on the register, no payroll tax expense, no fee line and no liability to compare with deposits.

A cash-basis S corporation pays its owner

An S corporation on cash-basis books pays its owner $60,000 a year through payroll, $5,000 a month on the last day. Income tax withheld is $500 a month. Each month the owner's Social Security and Medicare withholding is $382.50, and the corporation owes the same.

Each month the books show wages $5,000 and payroll tax expense $382.50 in the month paid. Unemployment tax is left out. FUTA on the owner's first $7,000 of wages is $42 with the full state credit, or $420 at 6.0% if the state leaves officers' wages out of its unemployment tax (Form 940 instructions). It is not on Form 941. The monthly entry credits the bank $4,117.50 for net pay, income tax withheld $500, Social Security payable $620 and Medicare payable $145: $1,265 of liability a month.

For the quarter, wages are $15,000 and the liabilities credited are $3,795. Form 941 shows the same: line 3 $1,500, line 5a tax $1,860, line 5c tax $435, line 5e $2,295, and line 12 $3,795. As a monthly depositor, the corporation deposits $1,265 by the 15th of each following month. On March 31 the three liabilities still hold the March $1,265, and the April deposit clears it. The owner's distributions never go through this entry.

Different for you?

• Your provider's reports, your bank and your books each show a different number, or a quarter's Form 941 does not agree with the W-2 totals: the cause is either the books or a filing, and which one decides whether you correct entries, file an adjusted return, or both. Trace each quarter from the register and the provider's tax reports to your IRS account and the filings, or get bookkeeping help to do it.
• The provider missed a deposit or the IRS sent a notice: see a provider that did not pay the taxes and behind on payroll taxes. The books need the same correction. Get bookkeeping help when the filings and the books both have to change.
• Months of payroll were never posted, or were posted as one expense: the books have to be rebuilt from the provider's reports and checked against your IRS account, and filings may need correcting. See catching up on overdue books, or for an S corporation S corporation catch-up books. Or get bookkeeping help to rebuild them.
• A pay run was wrong: see fixing a payroll mistake.
• Wages were earned in December and paid in January: see accrued payroll at year end.
• A payroll liability balance will not clear: see payroll liabilities that won't clear.
• You are switching payroll providers mid-year: see switching payroll providers.
• You are hiring your first employee, or your corporation is putting you on payroll: see setting up payroll.
• You own an S corporation and pay yourself: see S corporation owner salary for how much, and S corporation bookkeeping for the accounts.
• You have employees in more than one state: see employees in another state. Each state tax needs its own liability account, and the books and filings multiply.
• You need the same entries for a Canadian business: see the Canadian payroll journal entry.