To calculate salaries expense, add each employee’s gross pay for the period to the employer-side payroll taxes, workers’ compensation premiums, and employer-paid benefits tied to those wages. The formula is: Gross Pay + Employer FICA + FUTA + SUTA + Workers’ Comp + Employer-Paid Benefits. Employee withholdings (federal income tax and the employee’s share of FICA) come out of gross pay and do not increase the expense, but the employer’s matching taxes and contributions do. For 2026, the employer share of FICA alone adds 7.65% on top of every wage dollar up to the Social Security wage base, and once unemployment taxes, insurance premiums, and benefits are layered in, the total cost of employing a worker typically runs well above the paycheck amount.
Start With Gross Pay
Gross pay is the foundation. Every employer tax and contribution is calculated as a percentage of it, so an error here propagates through the whole expense.
For hourly workers, multiply hours worked by the hourly rate. A 40-hour week at $25 an hour produces $1,000 in gross pay. For salaried employees, divide the annual salary by the number of pay periods. A $52,000 salary paid bi-weekly comes to $2,000 per period ($52,000 ÷ 26).
Federal law requires overtime at one and one-half times the regular rate for non-exempt employees who work more than 40 hours in a workweek.1U.S. Department of Labor. Fact Sheet #23: Overtime Pay Requirements of the FLSA A worker paid $25 an hour who logs 45 hours earns $1,000 for the first 40 hours plus $187.50 for the five overtime hours ($37.50 × 5), a weekly gross of $1,187.50. Commissions and bonuses paid in the period get added to this figure as well.
Taxable Fringe Benefits Go Into Gross Pay
Some employer-provided perks have to be added to wages for tax purposes. The IRS treats any fringe benefit as taxable unless a specific exclusion applies.2Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits The common ones people miss:
- Group-term life insurance coverage above $50,000 gets added to the employee’s wages.
- Employer-provided commuter benefits and qualified parking are each excludable up to $340 per month in 2026. Anything above that threshold is taxable wages.2Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits
- Personal use of a company phone or vehicle provided to boost morale (rather than for a clear business need) is taxable.
Because employer taxes are calculated on the gross figure, overlooking taxable fringe benefits understates your salaries expense and creates mismatches when the IRS reconciles quarterly Form 941 filings against the annual W-3.3Internal Revenue Service. Instructions for Form 941 (03/2026)
Add the Employer Payroll Taxes
Once gross pay is set, layer in the taxes the business itself owes. These are on top of what you withhold from employees.
Employer FICA: Social Security and Medicare
The employer matches the Social Security and Medicare taxes withheld from employees. The employer share is 6.2% for Social Security and 1.45% for Medicare, totaling 7.65%.4Office of the Law Revision Counsel. 26 U.S. Code 3111 – Rate of Tax For 2026, Social Security tax applies only to the first $184,500 of each employee’s annual wages.5Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet Medicare has no wage cap and applies to all covered wages.6Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
There is a 0.9% Additional Medicare Tax on wages above $200,000, but employers do not match it. The only employer duty is to withhold it once the employee crosses the threshold.7Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
On $2,000 of bi-weekly gross pay, employer FICA works out to $124 for Social Security ($2,000 × 6.2%) and $29 for Medicare ($2,000 × 1.45%), or $153 total for that period.
FUTA
Federal unemployment tax is 6.0% on the first $7,000 of each employee’s annual wages.8Office of the Law Revision Counsel. 26 U.S. Code 3301 – Rate of Tax If your business pays into a state unemployment fund, you get a credit of up to 5.4%, dropping the effective rate to 0.6%.9Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return At the reduced rate, the maximum FUTA cost per employee is $42 a year ($7,000 × 0.6%). Nothing is withheld from employees; FUTA is entirely the employer’s expense.
SUTA
Every state runs its own unemployment insurance program with its own tax rate and wage base. Rates depend on your industry, payroll size, and claims history, so a company with frequent layoffs pays more than one with stable employment. State wage bases range from $7,000 to over $78,000, and rates can run from fractions of a percent up to nearly 6% for employers with poor experience ratings. Check your state’s unemployment agency for the exact rate and wage base that apply.
Add Workers’ Comp and Employer-Paid Benefits
Most states require employers to carry workers’ compensation coverage, and premiums are quoted as a rate per $100 of payroll. The rate depends on each employee’s job classification (office work costs far less to insure than construction) and your company’s experience modification rating. A clean-record business might pay under $1 per $100 of payroll for desk jobs, while high-risk occupations can run well above $10 per $100. This premium belongs in salaries expense because it scales directly with having employees on payroll.
Employer-paid benefits close out the calculation:
- Retirement plan matching. A 3% 401(k) match on $2,000 of bi-weekly gross pay adds $60 per period. For 2026, the employee elective deferral limit is $24,500.10Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
- Health insurance premiums. The employer’s share of group health premiums is often the single largest non-wage employment cost.
- Other benefits. Employer-paid disability insurance, life insurance premiums below the $50,000 exclusion, tuition reimbursement, and similar programs all count.
A common mistake is including the employee’s portion of benefit premiums (deducted from their paycheck) in salaries expense. That portion is already inside gross pay. Only the employer-funded share gets added on top.
A Full Worked Example
For a single employee earning $52,000 annually, paid bi-weekly:
- Gross pay per period: $2,000
- Employer Social Security (6.2%): $124.00
- Employer Medicare (1.45%): $29.00
- FUTA (0.6% on first $7,000, spread across pay periods): about $1.62 per period ($42 ÷ 26)
- SUTA: varies by state rate and wage base
- Workers’ comp: varies by classification and state
- 401(k) match at 3%: $60.00
- Employer health insurance share (hypothetical): $300.00
The employer’s additional cost beyond gross pay is at least $514.62 per pay period before SUTA and workers’ comp, roughly 25.7% on top of the $2,000 check. Multiply that across every employee and every pay period, and the salaries expense on the income statement runs substantially higher than the sum of the paychecks.
Handle Pay Periods That Cross the Accounting Period
Pay periods and accounting periods rarely line up. If a bi-weekly pay period runs July 21 through August 3 and your accounting month closes July 31, five working days of wages belong in July’s financials even though the check goes out in August.
The fix is an accrual entry. Count the working days that fall inside the closing month, divide by the total working days in the pay period, and multiply by the employee’s pay-period earnings. If 5 of 10 working days fall in July, the accrual is 50% of that period’s gross pay. On $2,000 of gross pay, that is a $1,000 accrual for July. Accrue the corresponding employer taxes and benefits on that $1,000 as well.
The journal entry debits salaries expense and credits accrued wages (a liability). When you actually pay the employee in August, you reverse the accrual and record the cash disbursement. Skipping this understates expense in one month and overstates it in the next.
Record the Journal Entry
Once you have total salaries expense for the period, the entry has two sides. Debit salaries expense, which increases the expense on the income statement. Credit a combination of accounts: cash or the bank account for the net pay disbursed, liability accounts for taxes not yet remitted (FICA payable, federal income tax withheld), and accrued benefits for any employer contributions not yet paid to insurers or plan administrators.
A dedicated payroll journal, kept separate from the general journal, makes each pay run’s debits and credits easier to track and reconcile. After each cycle, reconcile the amounts against bank statements to catch processing errors, uncashed checks, and bank fees. These reconciled figures feed directly into quarterly Form 941 filings and the annual Form 940.11Internal Revenue Service. About Form 941, Employer’s Quarterly Federal Tax Return
Independent Contractors Are Not Part of This Calculation
The formula only applies to workers classified as employees. Independent contractors pay their own taxes, so a business owes no employer FICA, FUTA, SUTA, or benefits on their pay. That cost gap tempts some businesses to classify workers as contractors when the relationship is really employment, and the IRS scrutinizes this closely, weighing behavioral control, financial control, and the nature of the relationship.12Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor Misclassifying an employee as a contractor can make the business liable for the unpaid employer taxes going back to when the misclassification started. If a worker is really an employee, they belong in the salaries expense calculation from day one.