When a business has fewer than 10 employees, tracking wages, deductions, and other payroll concerns is fairly straightforward. However, tracking payroll for companies with more than 10 employees can quickly get unwieldy. That’s where a payroll ledger — a manual or digital financial document that helps companies track compensation — can be a difference-maker.
What you’ll learn
What you’ll learn
Updated: July 14, 2025
Key takeaways
- A payroll ledger is a financial record of each employee’s pay over a selected period of time
- The ledger should include employee information, pay periods, gross wages, deductions, and net pay
- Accurate ledgers help companies monitor labor costs and ensure compliance with existing payroll regulations.
- Digital ledgers are often more accurate and efficient than manual ones
Using a ledger to record all of your payroll odds and ends in one place can help organize record-keeping, reduce tax reporting errors, and grow with you as your staff increases. If you are just getting familiar with the concept of financial ledgers, we’ll cover their key components, the different types, and how to create one that works for your business.
Key components of a payroll ledger
When it comes to what employers should know about a payroll ledger, we need to start with the basics. Typically, a payroll journal entry includes:
- Employee information: Includes the employee’s full name, ID number, and position or title. The entry should also include the employee’s department and pay rate, whether hourly or salary.
- Pay periods: How often employees receive their pay (weekly, bi-weekly, monthly, bi-monthly, etc) and the start and end dates for each pay period.
- Gross wages: This includes the total earnings for a specific pay period, and it should comprise an employee’s base salary, overtime pay, bonuses, commissions, and any tips (if applicable).
- Deductions: These are amounts subtracted from gross wages. They may include taxes, Social Security and Medicare (FICA), benefits, union dues, or wage garnishments.
- Net pay: The amount an employee takes home after all deductions.
If you use payroll software or a digital payroll ledger, the program typically provides fill-in-the-blank spaces and specifies the information you should include. Mapping the general ledger in software is usually unique to the program, so check with your software to learn how.
“Make sure you track hours worked for hourly employees and maintain detailed salary records for salaried employees. Connecting your payroll ledger software to your time tracking software can help automate this process.”
— David Kindness, CPA
Now that we better understand what details a ledger normally includes, let’s find out why so many employers use them.
Importance of a payroll ledger
To start, a payroll ledger’s significance stretches beyond mere data collection and record-keeping. It plays a vital role in regulatory and HR compliance practices. Some of its most essential functions include:
- Accuracy in wage calculations: A ledger allows for thorough tracking of employee details and payroll expenses, including hours worked and gross earnings. It also requires regular updates with every pay period, providing timely adjustments to wage calculations. Digital tools can improve accuracy even more with automated calculations.
- Monitoring labor costs: By documenting all payroll-related expenses, you create a historical reference, which is handy when calculating an annual wage budget. With accurate records, your business can make better decisions about hiring, raises, budget allocations, and forecasting.
- Compliance with tax regulations: A payroll ledger is an essential tool for tax reporting. It creates a thorough record of all employee earnings and deductions. A well-maintained ledger can help businesses avoid penalties or legal issues during tax audits, payroll audits, or financial reviews.
- Data security and confidentiality: A digital ledger can ensure the security and confidentiality of sensitive information. Digital systems and software usually allow for the implementation of strict access controls. The tools also include regular data backups to protect against possible cyber attacks or system failures.
“Misclassifying employees is a common pitfall that you need to avoid. There are certain laws, like minimum wage and overtime laws, that apply to employees but not to contractors. Missclassifying one as the other can result in penalties, legal issues, or even damage to your reputation. Regularly auditing your payroll ledger can help ensure you don’t misclassify workers.”
— David Kindness, CPA
With some of the more significant benefits under our belts, let’s learn more about the different payroll ledger options businesses typically choose from.
Types of payroll ledgers
Most payroll ledgers fall into one of two categories: manual or digital.
Manual ledger
Manual ledgers are more traditional and often use pen and paper, but they may also be created on a spreadsheet program like Excel or Google Sheets.
Potential pro
The benefit of manual ledgers is their simplicity. They don’t require any technical skills and are extremely cost-effective to create. Many spreadsheet programs are even free. Manual options also provide a physical or tangible record that’s safe from cybercriminals due to end-to-end encryption and storage on local hard drives.
Potential con
Unfortunately, manual ledgers are time-consuming and require significant data entry, calculations, and reconciliations. The effort and complexity make these options prone to error. Also, just because a document is a physical copy doesn’t mean it’s safe from all threats. A physical record is susceptible to water and fire damage and may be difficult to store long-term.
Digital ledger
Alternatively, a digital payroll ledger automates calculations and report generation, while adding both security and remote access – but it comes at a cost.
Potential pros
This option can save time and reduce the likelihood of errors. Additionally, choosing this option often allows for integration with other business tools, such as accounting software, time tracking tools, or tax preparation apps. Depending on the ledger software or platform, digital options provide more accessibility features, like remote access and user access controls. Payroll ledger software companies also take security seriously, offering robust end-to-end encryption and automatic backups.
Potential cons
The primary drawbacks of using digital technology include costs and training. Advanced digital solutions often have subscription fees that accumulate over time, and your team may not be familiar with the tools, which can add to costs. Finally, some business owners are more reluctant than others to depend on technology. Still, depending on the size and complexity of your operation, digital options can streamline data entry processes and improve accuracy.
We’ve covered a lot of ground so far, but it’s important that we touch on how to create a payroll ledger.
Creating a payroll ledger
Payroll ledgers can vary slightly depending on your business, industry, and pay structure. Still, most ledgers rely on largely the same process and data. The first thing you must do is choose a format you’re comfortable with. Traditional ledger books (actual physical books that you can order online) are affordable and might be suitable for businesses with only a few employees. Spreadsheets can work for small businesses, but payroll ledger software is usually best for businesses with multiple employees.
Next, you need to define data categories. These can be unique to your business, but they should include, at a minimum, employee details, pay periods, gross wages, deductions, and net pay.
Finally, define an update schedule. This will go a long way toward maintaining accurate records with timely information. Ideally, the update schedule should sync with your company’s pay schedule. That said, using monthly reconciliations or quarterly audits is also acceptable. With a digital ledger, you can usually automate the update process.
Bottom line: Using a payroll ledger is worthwhile
A payroll ledger is an essential tool for businesses of all sizes. However, the tool is only as good as the accuracy of its inputs. It serves as the source of truth for all wages, deductions, and provides clear insight into what your business spends on payroll. Additionally, it offers an efficient way to maintain updated payroll documents, track company headcount, and create a central location for all tax paperwork. Whether you choose a manual solution or opt for a digital approach, implementing a payroll ledger is certainly worth a closer look.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.