Financial management is typically the cornerstone of success for small business owners. It may not happen overnight, but having a process makes a difference when assessing liabilities, cash flow, labor costs, and more. A large piece of the puzzle is accurately tracking payroll to improve financial reporting, ensure tax compliance, and enable strategic decision-making.
What you’ll learn
What you’ll learn
Updated: July 14, 2025
Key takeaways
- A payroll journal entry is a formal record of payroll costs (gross wages, deductions, and taxes)
- Entries are crucial for accurate financial reporting, tax compliance, clean audits, and correct employee pay
- Best practices for journal entries include regular reconciliation, using payroll software for automation, and auditing entries
That’s where payroll journal entries enter the picture. In this guide, we’ll explain what payroll journal entries are and how you can build a process to streamline your payroll management starting today.
What payroll journal entries record
Put simply, the objective of a payroll journal entry is to create a clear and permanent record of payroll transactions, which are all compiled in a general ledger. While at one time these were recorded manually, today most ledgers are digital.
The entries record employee wages and all corresponding payroll expenses, turning raw payroll data into detailed financial records for analysis and reporting.
Pro tip
“A journal entry is a fundamental concept in accounting. It’s what accountants and businesses use to ensure accurate records of transactions, from buying a pencil to purchasing a building, and everything in between.”
— David Kindness, CPA
Why accurate payroll journal entries matter
Maintaining accurate payroll journal entries matters for financial reporting, legal compliance, and audits, as well as employee morale. Journal entries form the foundation of your company’s financial statements, including income statements, balance sheets, and cash flow statements. Similarly, they’re essential for accurately reporting payroll taxes to federal, state, and local tax authorities.
Entries also provide a clear audit trail, making it easier to create financial reports for a specific accounting period. These reports can help create a clear picture of your business’s financial health and performance, which is vital to stakeholder interests and support.
Additionally, payroll journal records help ensure employees are paid correctly. Correct payments can build trust and encourage positive employee morale, reducing discontent in the office or among team members and management.
Now that you understand the importance of payroll journal entries, let’s discuss how to create them. We will focus on two methods: traditional manual entries and digital entries using payroll software.
How to create payroll journal entries
When it comes to the types of payroll journal entries, there are three common cones: initial recording, accrued wages, and manual payments. An initial recording, or primary payroll entry, records gross wages earned and associated deductions — this is the type of entry we focus on in the following examples.
An accrued wages entry is a record of wages earned by an employee but not yet paid for a specific accounting period. The manual payments entry is a record of payments made outside of the payroll process, typically used when correcting an over- or under-payment.
Manual payroll journal entry method
With basic definitions out of the way, take a look at a payroll journal entry example:
| Date | Account | Debit | Credit |
| 06/27/2025 | Wage and salary expense | $1,000 | |
| 06/27/2025 | Payroll tax expense | $96.50 | |
| Cash | $753.50 | ||
| Income tax payable | $120.00 | ||
| FICA tax payable | $153.00 | ||
| Health insurance payable | $50 | ||
| Unemployment tax payable | $20 | ||
| To record payroll for pay period X | |||
| Total | $1,096.50 | $1,096.50 | |
The debit column represents what the company spent for a specific pay period and employee. The credit column indicates where the money has gone or is owed. The first debit (wage and salary) is the employee’s gross pay for the pay period. The second is the employer’s direct share of taxes. It comprises the employer’s FICA match and any federal or state unemployment tax.
In the credit column, the first number ($753.50) is the employee’s net “take-home” pay for the period. The second number ($120) is the federal and state income tax withheld from their paycheck. The business holds this money in a liability account until it’s paid to the government. The FICA tax payable credit of $153 is the amount owed to the government for Social Security and Medicare. It includes both the employee’s share ($76.50) and the employer’s share ($76.50).
The next credit, health insurance payable ($50), represents the employee’s deducted premium that the company owes to the insurance provider. The final liability, unemployment tax payable ($20), corresponds to the taxes the employer owes from their own payroll tax expense. When finished calculating the entry, the totals debits must match the total credits, showing a breakdown of payroll costs.
“A general ledger is the most complete and detailed record of transactions that accountants use every day. It’s a comprehensive ongoing record of all transactions, including assets, liabilities, equity, revenues, and expenses.”
— David Kindness, CPA
Using payroll software for journal entries: smart strategies
Manual payroll entries are time-consuming, and the repetitiveness and complexity of this task can easily lead to errors. Payroll software simplifies payroll processing by eliminating redundancies and automating many complex tasks, including calculating wages, deductions, and tax liabilities.
OnPay’s software can make this process even easier and more streamlined. It can sync with other accounting software, such as QuickBooks and Xero, creating journal entries without the need for any manual data entry, dramatically improving accuracy and saving you time and stress.
Common payroll journal entry mistakes to avoid
While payroll software can improve the accuracy of payroll journal entries, it still requires human input for critical data. Most mistakes occur during data entry, including:
- Transposing errors
- Misclassifying employees
- Incorrect accruals
Regarding accruals, errors can occur when recording expenses or revenues incurred but not yet paid or received. In payroll terms, this often refers to failing to record wages for work performed in one period but not paid until the next, resulting in misstated unpaid wages. The correct procedure in such cases is to debit the wage expense account and credit the liability account.
Reconciling payroll journal entries with payroll reports
Even with detailed records and assistance from professional software, mistakes can happen. That’s why it’s crucial to regularly reconcile your payroll journal entries against source documents to guarantee accuracy. The comparison process involves assessing general ledger entries against payroll reports. A payroll register is vital to the assessment because it provides a complete itemization of the payroll run. Your payroll software should be able to generate a payroll register automatically, making this process easy.
“OnPay is simple to set up and makes payroll processing and employee communication straightforward. It’s also great for keeping track of historical records, and the price is really reasonable for everything you get.”
— Doug Schuessler, Montgomery Soccer Inc.
How payroll taxes fit into journal entries
In the details of payroll accounting entries, you, as the employer, must record any tax liabilities for the business. The primary liabilities include employer-paid payroll taxes, such as Social Security and Medicare (FICA) taxes, federal unemployment taxes (FUTA), and state unemployment taxes (SUTA).
If you review the payroll journal entry example above, you’ll see that the payroll tax expense account is debited to record the cost, while the corresponding liability accounts (such as FICA tax payable and unemployment tax payable) are credited to show the amount owed.
Tips for maintaining accurate payroll journal entries
To maintain accurate payroll journal entries, it’s essential to follow best practices:
- Establish a reconciliation schedule (after every payroll run)
- Use a chart of accounts (specifying accounts to improve clarity)
- Automate where possible (using payroll software to eliminate manual errors)
- Regularly audit entries to assess payroll costs
Understanding these best practices is only part of payroll accuracy. You’ll want to continue to learn about payroll accounting, monitoring changes to rules and best practices.
Where to learn more about payroll accounting
You can learn more about payroll accounting through online courses, professional certifications, or more formal education programs. For immediate guidance, review our employer’s guide on how to learn payroll.
Payroll journal entries are the pillar to build on
Think of payroll journal entries as the foundation upon which your entire financial house is built. Just as a strong pillar supports everything above it, accurate payroll entries support your financial reporting, tax compliance, and business decision-making. Once you establish good habits and processes, they become second nature, and modern payroll software can handle the heavy lifting while you focus on running your business. If you’re ready to simplify the process and eliminate the risks of manual entry, check out OnPay and get started today.
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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.