Accrued salaries are wages employees have already earned by working during an accounting period but that the employer hasn’t paid out by the time the books close. Under accrual-basis accounting, you record them as an expense in the period the work happened and as a current liability until payday clears them. For a business with a $5 million annual payroll that closes its books mid-cycle, the unpaid balance on any given reporting date can easily run $100,000 or more, so getting the entry right matters.
Why the Accrual Is Required
Accrual accounting records expenses when they’re incurred, not when cash moves. The reason is the matching principle: labor costs belong on the same income statement as the revenue that labor helped produce. If your team generated $200,000 of revenue in March but doesn’t get paid until April 5, those wages still belong in March. Skip the accrual and March looks artificially profitable while April looks artificially expensive.
The Financial Accounting Standards Board’s codification is the authoritative source of U.S. generally accepted accounting principles governing how these accruals are handled.1Financial Accounting Standards Board (FASB). Standards Ignoring accrued wages understates liabilities and overstates net income, which is why auditors look for them.
When Accrued Salaries Show Up
The common trigger is a mismatch between your pay cycle and your reporting cutoff. If your quarter ends on a Wednesday but you pay every other Friday, the working days since the last payday are earned but unpaid. Accountants call that gap the stub period. Any business on biweekly or semimonthly payroll runs into it, and companies closing monthly books face it almost every month.
Overtime for Non-Exempt Workers
Federal law requires at least one and a half times the regular rate for every hour a non-exempt employee works over 40 in a workweek.2U.S. Department of Labor. Fact Sheet 23 Overtime Pay Requirements of the FLSA Each workweek stands alone under the FLSA — you cannot average hours across two weeks to avoid the premium.3eCFR. Part 778 Overtime Compensation When a workweek straddles the reporting cutoff, you estimate the hours that fall inside the closing period and accrue overtime at the premium rate, not straight time.
Earned Bonuses and Commissions
Bonuses and commissions that have vested based on performance during the period also count as accrued compensation. The IRS classifies these as supplemental wages, which changes how withholding is handled when they’re paid.4Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide A salesperson who hit a quarterly target by March 31 but is paid in April has earned the bonus in March, so that’s where it belongs on the books.
Calculating the Accrual
Three inputs drive the number: each employee’s pay rate, the unpaid days or hours in the stub period, and any additional earned compensation like overtime or bonuses.
For salaried staff, divide the annual salary by 260 working days (52 weeks × 5 days) to get a daily rate, then multiply by the working days in the stub period. For hourly staff, multiply the hourly rate by actual hours worked in the stub period, layering overtime premiums where they apply.
Here’s a worked example. The reporting period ends on a Wednesday and payday is the following Friday, so Monday, Tuesday, and Wednesday sit in the stub period.
- Salaried employee earning $78,000 per year: $78,000 ÷ 260 = $300 per day × 3 days = $900
- Hourly employee at $25/hour working 8-hour days: $25 × 24 hours = $600
- Total accrued salaries for these two employees: $1,500
Scaled across a full workforce, that number gets material fast. Auditors will check whether stub-period figures reconcile to actual payroll records once the pay cycle completes.
The Journal Entry
The entry is a standard double-entry. Debit salary expense (raising the expense on the income statement) and credit accrued salaries payable (raising the liability on the balance sheet). Using the example above:
- Debit: Salary Expense — $1,500
- Credit: Accrued Salaries Payable — $1,500
Date the entry on the last day of the reporting period. That puts both the expense and the liability in the right window.
Reversing the Entry Next Period
Most accountants post a reversing entry on the first day of the new period, flipping the original: debit accrued salaries payable, credit salary expense, same $1,500. When the next payroll runs, the payroll system records the whole check as salary expense in the ordinary way. The reversal keeps you from double-counting the stub-period wages already recognized in the prior period. Without it, every paycheck spanning a period boundary would need a manual split, which is slow and error-prone.
Accruing the Employer Payroll Taxes
Wages aren’t the only obligation created when employees work. The employer’s share of payroll taxes attaches to the same wages and should be accrued in the same period. Skipping this step is one of the more common mistakes.
Social Security and Medicare
Employers pay 6.2% for Social Security and 1.45% for Medicare on employee wages, matching what’s withheld from the employee.5Office of the Law Revision Counsel. 26 U.S. Code 3111 – Rate of Tax Social Security applies only to the first $184,500 of each employee’s 2026 wages; Medicare has no cap.4Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide On a $50,000 accrual with no one over the Social Security ceiling, the employer FICA accrual is roughly $3,825 ($50,000 × 7.65%).
Federal and State Unemployment Tax
FUTA is 6.0% on the first $7,000 of each employee’s annual wages, with most employers taking a credit of up to 5.4% for state unemployment taxes paid, leaving an effective rate near 0.6%.6Internal Revenue Service. Topic No. 759 Form 940 Employers Annual Federal Unemployment (FUTA) Tax Return FUTA only affects the accrual if employees are still under the $7,000 threshold; for most full-time workers, the base is exhausted by mid-February. State unemployment tax rates and wage bases vary by state and by employer experience rating.
The combined payroll tax accrual is booked as a debit to payroll tax expense and a credit to payroll taxes payable, kept separate from the wage accrual accounts.
Vacation, Sick Leave, and Other Paid Time Off
Under GAAP, employers also have to accrue a liability for compensated absences — vacation, sick leave, and similar PTO — when four conditions all hold: the obligation stems from work already performed, the time either vests or accumulates period to period, payment is probable, and the amount can be reasonably estimated. The accrual happens as employees earn the time, not when they use it.
Vesting and accumulating aren’t the same. Vested time must be paid out even if the employee quits; accumulated time simply rolls forward. Both require accrual. An employee who has banked 8 unused vacation days worth $2,400 by year-end puts $2,400 on the balance sheet as a liability. In companies with generous PTO policies or large headcounts, the running balance can reach the millions.
Where It Lands on the Financial Statements
Accrued salaries sit in current liabilities on the balance sheet because they’ll be settled inside the next pay cycle, well under the one-year threshold. For SEC registrants, Regulation S-X requires accrued payroll to be broken out separately when it exceeds 5% of total current liabilities.7eCFR. Part 210 Form and Content of and Requirements for Financial Statements – Section 210.5-02 Balance Sheets Below that threshold, the amount can be bundled into a general accrued-liabilities line.
Because the accrual raises current liabilities, it moves liquidity ratios. Current ratio (current assets ÷ current liabilities) and quick ratio (cash plus receivables plus marketable securities, all divided by current liabilities) both drop when the entry is posted. A company at a 2.0 current ratio before the accrual might sit at 1.85 after, which can matter under loan covenants tied to a minimum ratio.
When You Can Actually Deduct the Accrual
For accrual-basis taxpayers, the timing of deduction depends on two IRS tests: the all-events test (the liability is fixed and the amount can be determined with reasonable accuracy) and economic performance.8Internal Revenue Service. Publication 538 – Accounting Periods and Methods For wages, economic performance happens as employees work, so that condition is easy. Bonuses are the harder case.
The recurring-item exception lets an accrued expense stay deductible in the current year if economic performance occurs within 8½ months after year-end.9Office of the Law Revision Counsel. 26 USC 461 General Rule for Taxable Year of Deduction For accrued bonuses specifically, the IRS has treated the relevant deadline as the 15th day of the third month, effectively March 15 for calendar-year filers.10Internal Revenue Service. Revenue Ruling 2011-29 Miss the window and the deduction slides to the year you actually pay. On a $500,000 year-end bonus pool, the tax-timing difference is substantial. Books and tax can diverge here: your December financials may show the expense while the IRS pushes the deduction into the following year.
Accrued Wages for Departing Employees
When someone leaves, unpaid wages become an immediate compliance issue. Federal law doesn’t require a same-day final paycheck, but many states impose short deadlines, ranging from the last day worked to the next regular payday.11U.S. Department of Labor. Last Paycheck Missing those deadlines can trigger daily waiting-time penalties that exceed the wages owed.
The final check should include all accrued wages through the last day worked, plus any vested vacation or PTO your state or company policy requires you to pay out. If the departure lands mid-period, calculate the stub-period wages the same way you would at a reporting cutoff, then settle inside the state’s deadline. Getting it wrong creates both a financial misstatement and a wage-and-hour exposure.