Payroll accounting includes the computation of gross wages (hours worked times hourly pay rate) and other compensation such as salaries, employee commissions, and bonuses. Payroll accounting also involves payroll withholdings, such as Social Security and Medicare taxes, federal and state income tax withholding, and voluntary withholdings. Voluntary withholdings include union dues, health insurance premiums, United Way contributions, and contributions to savings and retirement plans.
In addition to the computation of the gross wages and salaries, payroll accounting is involved with the calculation and reporting of other payroll related expenses. These additional employer expenses include the matching of Social Security and Medicare taxes, federal and state unemployment taxes, worker compensation insurance, paid holidays, paid vacation days, pension costs, health insurance premiums, and so on. These expenses can amount to an additional 40% of the employees' wages and salaries.
Because of accrual accounting and the matching principle, it is reasonable that companies should recognize the expense and liability of payroll related costs when they are earned by the employees—not when the company pays the costs. For example, the cost of providing agreed upon vacations should be reported as an additional labor cost and a liability when the employee is earning the vacation. Retirement pay and company-paid health insurance during employees' retirement years should also be recorded as an additional cost of labor and as a liability when the employees are working and earning these benefits.
The payroll taxes withheld from employees' pay and the payroll taxes that are an additional cost of the employer are reported as current liabilities until they are remitted to the federal and state governments and other parties.
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Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Read more about the author.