Accrued payroll is the compensation your employees have earned by the end of an accounting period but haven’t been paid yet, including gross wages, the employer’s share of payroll taxes, and any benefits that build up with hours worked. You record it with a single period-end journal entry: debit a payroll expense account and credit a current liability account for the same total. That one entry pulls the cost into the period the work actually happened, which is what Generally Accepted Accounting Principles require under the matching principle. Skip it, and your income statement overstates profit for the period that got the labor and understates it for the period that pays the check.
What Goes Into the Accrual Amount
Find two dates first: the last day your employees were paid and the last day of the accounting period. The workdays between them are your accrual window, and every dollar of compensation earned in that window needs to be captured.
Wages for Salaried and Hourly Workers
For salaried employees, divide annual compensation by the number of working days in the year (typically 260 or 261) to get a daily rate, then multiply by the number of workdays in the accrual window. For hourly workers, tally each person’s hours during the window and multiply by their hourly rate.
Overtime earned but not yet paid belongs in the accrual too. Under the Fair Labor Standards Act, all overtime an employer orders, approves, or knowingly permits must be compensated, and the premium is the regular rate multiplied by 1.5 for hours beyond 40 in a workweek.1U.S. Office of Personnel Management. How to Compute FLSA Overtime Pay If any part of an overtime workweek falls inside the accrual window, the corresponding overtime cost accrues.
The Employer’s Tax Burden
Gross wages don’t capture the full cost. You also owe the employer’s share of payroll taxes on those wages, and each tax has its own cap and rate:
- Social Security: 6.2% on each employee’s wages up to the 2026 wage base of $184,500. Once year-to-date earnings cross that cap, no further Social Security tax accrues.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide3Social Security Administration. Contribution and Benefit Base
- Medicare: 1.45% on all wages with no cap. The 0.9% Additional Medicare Tax on wages above $200,000 falls on the employee only and creates no employer cost.4Office of the Law Revision Counsel. 26 USC 3111 – Rates of Tax2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
- FUTA: 6.0% statutory rate on the first $7,000 of annual wages per employee, reduced to an effective 0.6% for employers in states without outstanding federal unemployment loans. By December most employees are already past $7,000 in year-to-date wages, so year-end FUTA accruals are often zero.5U.S. Department of Labor. FUTA Credit Reductions
- SUTA: State unemployment tax rates and wage bases vary widely, driven by your state’s fund balance and your company’s claims history. Same year-to-date logic as FUTA: if employees have earned past the state cap, no SUTA accrues for them.6U.S. Department of Labor. Unemployment Insurance Tax Topic
Benefits That Accrue With Wages
Any employer-paid benefit that builds up proportionally with hours worked belongs in the calculation. The two most common are the employer match on 401(k) contributions and the employer share of health insurance premiums. Estimate the 401(k) match from employee contributions during the accrual window. Health premiums are usually fixed monthly amounts, so prorate them for the days in the window. Add benefits to wages and the employer tax burden to arrive at the total accrual figure.
The Journal Entries
The bookkeeping runs in two phases: record the liability at period end, then clear it when the actual payroll runs. Assume the total accrual including taxes and benefits comes to $15,000.
Record the Accrual
On the last day of the period, debit Payroll Expense for $15,000 and credit Accrued Payroll Liability for $15,000. The debit puts the cost on the income statement in the correct period. The credit creates a current liability showing what you owe.
If you want more detail in your general ledger, split the debit into Wage Expense, Employer Payroll Tax Expense, and Benefits Expense, and split the credit into Accrued Wages Payable, Employer FICA Payable, and Accrued Benefits Payable. The combined totals still balance at $15,000. A single-line entry is faster and works fine for smaller payrolls.
Clear the Accrual the Next Period
Most accountants reverse the accrual on the first day of the new period: debit Accrued Payroll Liability for $15,000, credit Payroll Expense for $15,000. That zeros out the liability and leaves a $15,000 credit sitting in the expense account.
When the real payroll runs a few days later, say a full pay period of $40,000, record it normally: debit Payroll Expense for $40,000, credit the various tax withholding liability accounts for the amounts withheld, and credit Cash for the net paid to employees. Because the reversal already parked a $15,000 credit in Payroll Expense, the net expense recognized in the new period is $25,000, which is exactly the portion of the pay period that belongs there. The math corrects itself.
The alternative is to skip the reversal and true up the accrual at payroll time. Debit Accrued Payroll Liability for $15,000, debit Payroll Expense for $25,000, credit the withholding accounts, and credit Cash. The end result is identical, but you have to split every payroll between the accrued portion and the current-period portion by hand.
Bonuses, Commissions, and PTO
Regular wages are not the only payroll costs that need accruing. Three other categories catch companies off guard because they tend to be larger, lumpier, and easier to miss.
Bonuses
If employees earned a bonus during the period but will be paid later, debit Bonus Expense and credit Accrued Bonus Payable. The amount has to be fixed and determinable by the end of the period. A bonus set as a percentage of annual profit qualifies once the books close. A bonus that depends on the employee still being employed on the payment date may not, because the liability isn’t fully established until that condition is met.
Commissions
Sales commissions follow the matching principle like wages. If a salesperson closed deals in December, the commission is a December expense even if the check goes out in January. Calculate the amount using whatever structure applies (flat percentage, tiered rate, multi-factor formula) and record a debit to Commission Expense and a credit to Commissions Payable.
Vacation and PTO
Accrued vacation and paid time off create a liability that grows throughout the year. Under GAAP, you must accrue for compensated absences when four conditions are met: the obligation ties to services employees have already performed, the time off vests or accumulates period to period, payment is probable, and the amount can be reasonably estimated. A policy that lets unused days roll forward or pays them out at termination almost always meets all four.
Federal law doesn’t require employers to provide vacation pay or to pay out unused time at termination,7U.S. Department of Labor. Vacations but many state laws do require payout of accrued vacation when an employee leaves, so the liability is real in most workplaces. The entry mirrors the others: debit Vacation Expense, credit Accrued Vacation Payable, for the dollar value of hours earned but not used.
When the Accrual Is Tax-Deductible
Book accruals and tax deductions follow different rules, and confusing them is an expensive mistake. Recording a payroll expense on your income statement does not automatically mean you can deduct it on your tax return in the same year.
Cash-method taxpayers deduct wages and bonuses in the year they actually pay them, no matter when the work was performed. Accrual entries have no effect on the return.
Accrual-method taxpayers get more flexibility with conditions attached. To deduct an expense in the year it accrues, the IRS “all events test” requires that the obligation be established, the amount be determinable with reasonable accuracy, and “economic performance” have occurred.8Office of the Law Revision Counsel. 26 USC 461 – General Rule for Taxable Year of Deduction For wages, economic performance happens as employees perform services, so the first two conditions are what matter in practice.
Even when economic performance hasn’t technically occurred by year-end, a recurring item exception covers most payroll accruals. You can deduct an accrued liability in the current year if the all-events test is otherwise met, the item is recurring, and economic performance occurs within 8½ months after the close of the tax year.9eCFR. 26 CFR 1.461-5 – Recurring Item Exception Regular payroll accrued at December 31 and paid in early January clears this easily.
Accrued vacation pay has its own rule. An accrual-method employer can deduct it in the year earned if the amount is vested and paid within 2½ months after year-end. Pay it later, and the deduction shifts to the year of payment.10Internal Revenue Service. Publication 538 Accounting Periods and Methods Year-end bonuses follow similar logic: the amount must be fixed and determinable by December 31, and the bonus has to be paid within the 2½-month window to be deducted in the current year. Bonuses to related parties, such as a shareholder who owns more than 50% of a corporation, are subject to stricter rules and generally cannot be deducted until the year paid regardless of accrual.
Where It Shows Up on the Financial Statements
A single payroll accrual touches all three primary statements.
On the income statement, the debit increases operating expenses in the period the work was performed. Reported net income drops by the accrual amount, which is the point. Without the entry, profits would be overstated by that same amount.
On the balance sheet, the credit creates a current liability called Accrued Payroll or Accrued Compensation. It’s current because it settles within days or weeks when the next payroll runs. Lenders and investors read current liabilities to judge short-term liquidity, so leaving this line off makes your cash position look better than it is.
On the cash flow statement under the indirect method, an increase in Accrued Payroll means you recognized an expense that didn’t involve a cash outflow, so the increase is added back to net income in operating activities. When the accrual reverses and cash goes out in the next period, the decrease works the other way.