Accrued payroll refers to employee compensation that a company owes but has not yet paid. It includes wages, bonuses, payroll taxes, and other benefits that accumulate over the course of a pay period. Even though this money hasn’t been disbursed, it still counts as a liability on the balance sheet and must be accounted for in payroll calculations. Understanding how to calculate and track accrued payroll is essential for businesses to manage cash flow, remain compliant, and plan accurately.
For most businesses, labor is among the largest operating expenses. Tracking what is owed-before it’s actually paid-helps ensure accurate financial reporting. Accrued payroll gives a real-time picture of a company’s payroll liabilities, which is especially important at the end of a financial reporting period. If this information is missing or incorrect, businesses run the risk of overstating profits or underestimating expenses.
Accrual accounting requires that expenses be recorded when they’re incurred, not when they’re paid. This means that if a pay period ends on June 30 but employees don’t get paid until July 5, the wages for June still need to be recorded as June expenses. Without proper accruals, companies may make poor budgeting decisions or face compliance issues with tax agencies.
The most common type of accrued payroll is unpaid wages, such as hourly or salaried compensation that has not yet been issued by the end of a reporting period. But that’s just the beginning. Bonuses, commissions, overtime, and holiday pay are also part of accrued payroll if they’ve been earned but not paid.
Another important category is paid time off. In many companies, employees accrue PTO throughout the year. Even if they haven’t used their vacation days, those hours represent a liability on the company’s books. In the event of resignation or termination, those unused days are often paid out, making it important to track them consistently.
Payroll taxes are also part of the equation. Employers are responsible for federal payroll taxes such as Social Security and Medicare (FICA), as well as unemployment taxes. In some jurisdictions, additional local or state taxes apply. Contributions to employee benefits such as health insurance, 401(k) plans, or pension programs are also recorded as part of accrued payroll.
The alternative to accrued payroll is the cash accounting method, where payroll expenses are only recorded once payment is made. While simpler, this method doesn’t always reflect the business’s true financial position. Many small businesses start with cash accounting, but as they grow or are required to follow Generally Accepted Accounting Principles (GAAP), they must shift to accrual accounting. GAAP requires accrued payroll to be documented so that financial statements accurately reflect the business’s liabilities.
Cash accounting can delay the recognition of payroll expenses, leading to skewed income statements and potential tax reporting issues. By contrast, accrued payroll provides a more consistent and complete view of operational costs.
Payroll calculations for accruals start by multiplying the number of hours worked during the pay period by the employee’s hourly wage. For salaried employees, divide the annual salary by the number of pay periods in the year. Any bonuses or commissions that have been earned should be added, along with the cost of PTO earned during the period.
After that, employers must include their share of payroll taxes. For U.S. businesses, this typically means 6.2% for Social Security and 1.45% for Medicare, as well as unemployment taxes up to the relevant wage base. Don’t forget to include the employer's portion of any retirement contributions or insurance premiums.
Let’s walk through a basic example. Suppose you have an employee who earns $25 per hour and has worked 80 hours during the last two weeks of the quarter. That’s $2,000 in gross pay. She also earned a $300 bonus, accrued 8 hours of PTO worth $200, and your portion of payroll taxes and benefits adds another $400. The total accrued payroll would be $2,000 plus $300 plus $200 plus $400, which equals $2,900.
Once accrued payroll is calculated, it must be entered into your accounting system. Typically, this is done using a journal entry at the end of the reporting period. You’ll debit your wage expense account and credit your accrued payroll liability account. When you eventually pay employees, you’ll reverse the liability and reduce your cash account accordingly.
Reversing entries are a common method to manage accruals. You record the accrued payroll at the end of the month, then automatically reverse the entry on the first day of the next period. This ensures you don’t double-count expenses when payroll is eventually processed. However, some businesses prefer non-reversing entries and simply “true up” their records once payroll is paid.
One of the biggest mistakes in accrued payroll is forgetting to include the employer’s tax and benefit obligations. It’s not enough to record just the gross wages; you must account for every dollar that represents a liability.
Another common issue is missing supplemental pay. Overtime, bonuses, and commissions must be documented in the accrual period in which they were earned, not when they’re paid. Failing to include PTO accruals can also result in understated liabilities, which could cause problems if employees leave and expect a payout.
Manual payroll calculations can lead to human error, especially in companies with many employees or variable pay structures. Automating payroll accruals using software that integrates with your accounting platform can minimize mistakes and streamline reporting.
Because accrued payroll represents money owed, it appears under the liabilities section of your balance sheet. Specifically, it’s a current liability because it’s expected to be paid in the near term, typically within the next payroll cycle.
Accurate reporting of this liability is essential for financial transparency. Investors, lenders, and auditors often look at accrued payroll to assess how well a business is managing its financial obligations. Underreporting this figure can distort key metrics and lead to compliance issues during audits.
Managing accrued payroll isn’t just a bookkeeping task. It plays a vital role in financial planning, budgeting, and compliance. By maintaining a clear record of all payroll liabilities-including wages, bonuses, taxes, and PTO-businesses can anticipate expenses, reduce surprises, and make smarter decisions.
While small businesses can often manage accruals using spreadsheets and manual journal entries, growing organizations benefit from payroll software that automates this process. Integrating payroll with accounting ensures every liability is properly recorded and reconciled, saving time and reducing risk.
If your business is scaling or managing multiple pay types, automating payroll calculations may be the most reliable path forward. But even if you stick with manual methods, understanding the basics of accrued payroll is a crucial step toward stronger financial oversight.
Ready to simplify how you track and manage accrued payroll? Paypro’s payroll and workforce management solutions are built to help growing businesses stay compliant, accurate, and efficient.
Contact us today to learn how we can streamline your payroll process and support your financial goals.