What Is Accrued Payroll? Definition & Tips for Record Keeping

Accrued payroll is money employees have earned that the employer still needs to pay out. Business owners must track this impending payment to ensure they have enough cash to foot the bill on payday. Accurate cash projection ensures smooth processes and maintains good business relationships.

Accrued payroll and accounting are complex practices that take time to learn and master. This article explains what accrued payroll is, identifies its main components, shares record-keeping best practices, and provides calculation examples.

What is accrued payroll?

Accrued payroll is salary—including wages, bonuses, and other payroll expenses—that has accumulated without yet being paid. It’s also the name of the payroll accounting method employed by companies that use accrual accounting. Accrual accounting makes a payroll journal entry for expenses when owed, while the cash accounting method records income when paid.

Employee payroll is a liability, so bookkeeping must track what the business owes like it would with other accrued liabilities. This results in a debit to the payroll expense account and a credit to the accrued payroll liability account.

Why is understanding accrued payroll important?

Payroll is the biggest expense for most employers in the U.S. The more service-focused the business, the higher the expenses that go toward labor costs. Payroll management is also one of the most complex business activities and introduces several risks.

Some of the top reasons companies must ensure they understand how accrued payroll works include:

• Maintaining healthy cash flow. Accurate payroll tracking and cash projections let a business manage money wisely. These projections reduce the risk of running out of cash and paying high financing costs.
• Avoiding penalties or fines. Many states and governments regulate how frequently companies must pay employees. Delaying or withholding employee wages beyond those limits is illegal, so understanding liabilities helps businesses stay compliant. Tax agencies will also levy fines for late remittances.
• Generating accurate financial statements. Accrued payroll is a liability and affects the balance sheet. Payroll and accounting teams must track this accurately to generate correct financial statements.

Components of accrued payroll

Payroll accrual involves several moving parts that bookkeeping must review. Note that components vary across businesses and job positions because of differences in compensation packages.

Components of accrued payroll:

• Salary and wages
• Overtime pay
• Commission and bonuses
• Paid time off
• Benefits
• Taxes and deductions

1. Salary and wages

Salaries typically represent a fixed amount paid regularly, such as monthly or semi-monthly. Employees receive salaries even if they miss some work due to illness or days off. In contrast, wages depend on time worked and are typically hourly.

Salaries and wages make up 69% of employee compensation and expenses. Accurately calculating and accounting for this aspect of payroll accrual is crucial for maintaining positive cash flow and avoiding unnecessary legal risks.

Example 1: Paul works at a shipping company and receives $20 per hour to clear the warehouse. He took a day off to care for his sick son and only worked 33 hours last week. The company pays Paul bi-weekly. HR calculates that he accrued gross hourly wages of $660 (33 x $20) for the previous week.

Example 2: Carol, Paul’s partner, is a reservation specialist at a small hotel. The hotel pays Carol an annual base salary of $30,000 and sends a monthly direct deposit. Carol also took a day off to care for their sick son. Because she is salaried, she will still gross $2,500 ($30,000/12) for that pay period and her employer pays her usual salary at the end of the month.

2. Overtime pay  

U.S. law generally mandates that non-exempt employees receive overtime pay at a rate of at least 1.5 times their regular hourly rate for every hour worked over 40 hours in a workweek. Overtime pay is a significant accrued expense for many employers and should be accurately tracked in a company's financial records.

Accurately tracking accrued overtime can help companies identify needs for staffing adjustments. It also puts a predictable number on an irregular expense. Doing so ensures accurate adjusting entries to cash flow projections.

Example: Paul takes an extra shift the following week. He completes 49.5 hours of work. Because he is a covered non-exempt employee, he grosses $1,085 (40 x $20 + 9.5 x $30) that week. He has now accrued $1,745 ($1,085 + $660) for that bi-weekly pay period.

3. Commission and bonuses

Commission payments are often linked with performance metrics such as sales achieved or customer satisfaction ratings. Bonuses can be based on a worker’s individual success as well as the overall success of a department or the company. Bonuses are also often given in relation to holidays or other celebrations.

Companies must track these accrued liabilities as they are a significant component of employee compensation and expenses. These amounts vary and would be challenging to plan for without having an accurate projection of the total amount due.

‍Example: Carol's peers voted her employee of the month for March 2024. This carries a bonus of $200 on her next paycheck. Carol accrues $2,700 in gross monthly payroll ($2,500 salary + $200 bonus) for March 2024.

4. Paid time off

U.S. federal laws do not mandate paid time off for sick leave, vacations, federal holidays, or parental leave. That leaves paid time off up to individual agreements between workers and employers. This creates the following variations:

• Using an accrual basis for vacation days. Companies that do not use an accrual basis allow you to access your total vacation days at any time. Those that use an accrual basis may only allow you to access the days you have already earned.
• Allowing vacation days to roll over. Companies that allow vacation days to roll over move them to the following calendar year. Those that do not may either pay for the vacation days or dismiss them.
• Paying workers for vacation days not taken. Companies may compensate employees for days not taken at the end of the calendar year. Others may dismiss them and restart the PTO clock the following year.
• Providing unlimited paid time off. Unlimited PTO means no limit on how much PTO employees can take. Because there is no preset number of days, the company may not need to compensate employees who take no or fewer days off.

Example: Carol requests a week off to tour out-of-state universities with her teenage daughter. Carol has unlimited PTO, so her HR manager does not need to calculate her accrued amounts before approval. Paul's boss provides him with 80 hours of PTO per year. HR estimated that he accrued 47 hours when he requested time off in August.

5. Benefits

Employee benefits are non-wage compensation in addition to regular salary or hourly wages. These benefits provide employees with additional security, financial support, and flexibility. Here are some common examples:

• Health insurance
• Gym memberships
• Retirement funds
• Parking permits
• Bus tickets

Example: Not all benefits work on an accrual basis. Paul's employer provides matching contributions to his 401(k). Paul puts $100 into his retirement account per bi-weekly paycheck. Consequently, after a week of work, Paul has accrued $50 of retirement matching. Meanwhile, Carol's boss provides access to the gym at the hotel. Her employer does not need to calculate separate benefit accruals for her use because there are no additional payroll costs.

6. Taxes and deductions

Accrued payroll taxes and deductions represent money owed to various government institutions and other entities. Employers deduct and remit payroll taxes from employees’ paychecks. They also accrue matching or additional liabilities, which they must remit to the appropriate agencies at the correct times.

Taxes and deductions are critical because failure to pay carries severe penalties from external governing agencies and could trigger an audit. Taxes and tax agencies carry different remittance schedules. Companies can use IRS Publication 15 to determine when to remit federal taxes for different types of compensation.

Example: Carol lives in Nevada and has no state taxes. Her employer must still remit Medicare, Social Security, and income taxes on her behalf. It must also pay matching FICA taxes and a 6% FUTA tax on her first $7,000 of annual income.

The importance of record keeping

Maintaining detailed payroll records is crucial for any business. These are some of the top reasons business owners should take this seriously:

• Compliance. Accurate accrual record keeping ensures that a company complies with government regulations and avoids serious financial penalties.
• Transparency. Detailed records allow companies to track vacation days, benefits, and taxes while providing transparent communication with employees.
• Accuracy. Without accurate record keeping, companies may overpay or underpay employees for accrued vacation time or miss the mark for cash projection.
• Accounting. Companies must maintain accurate records to ensure the proper creation of other documents, such as the balance sheet and general ledger, at the end of the accounting period.

Types of records to keep

When it comes to payroll, companies need to keep accurate and detailed records for various reasons. Records to maintain include:

• Time and attendance records. These detail when employees clock in and out for work. Examples include time sheets and attendance logs.
• Payroll tax records. Employers must withhold and remit payroll taxes on their employees’ behalf. This includes federal and state income taxes, Social Security, and Medicare.
• Wage and hour records. These documents mainly apply to non-salaried workers and detail the hours worked and the matching hourly rates.
• Benefits records. HR personnel must keep detailed records of enrollment, changes, and payments. Examples include health insurance premiums and 401(k) contributions.
• Employment contracts and agreements. These documents outline the terms and conditions of employment and provide a written record of the relationship.

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Best practices for record keeping

Various factors affect record-keeping requirements. Examples include company size, workforce size, industry, data type, and governing agency.

These best practices can streamline your payroll record-keeping process and maintain compliance.

Tips for payroll accrual record keeping:

• Use electronic record keeping
• Ensure consistent and accurate record keeping
• Complete regular record reviews and updates
• Maintain secure record storage

1. Use electronic record keeping

Companies can ensure remote access to data by using electronic record-keeping methods. These methods also encrypt the data to meet confidentiality and data requirements.

Finally, electronic methods make it easy to automate the purging process. HR experts often follow the seven-year rule because it covers all the state and federal retention requirements.

Example: The HR team at the shipping company recognized a growing paperwork problem after being fined for being unable to locate important records. The team reviewed the files and found records as old as the company. It hired a professional shredding company to destroy all files over seven years old, and began the process of digitizing its remaining files.

2. Ensure consistent and accurate record keeping

Automating record-keeping is the best way to keep it consistent. Companies can automate every step of payroll accounting, from tracking current liability to creating financial statements.

Example: Paul's employer requires all workers to swipe their badge at a machine upon entering and leaving the warehouse. It records wage and hour records to show accrued payroll costs based on the number of hours worked.

3. Complete regular record reviews and updates

Bots do an excellent job of completing repetitive tasks, but they may be unable to handle anomalies and can still make mistakes. This might happen when the source data or processing rules have errors. Managers should complete manual reviews to resolve errors and ensure software handles the data correctly.

Example: Paul forgot his badge one day last week. He sent a text to the HR manager to confirm his arrival and departure. While completing her manual review, she made adjusting entries to ensure he received his pay for hours worked.

4. Maintain secure record storage

Payroll records rank among the most sensitive data that companies retain about employees. Social Security numbers and banking information are top examples. Companies must use high-level encryption for transmitted data and data at rest. They should also enforce zero-trust policies at the electronic and physical levels.

‍Example: The HR team at the shipping warehouse realizes that employee files still take up room that could store inventory. It selects a cloud storage company with an excellent reputation for data protection and tiered access. It then digitizes the documents. The HR manager retains the most recent and critical payroll data in her office's locked filing cabinet. The only three people with a key are those with necessary access, i.e., herself, the financial manager, and the general manager.

How to calculate accrued payroll

Calculations differ based on employee compensation packages and the applicable liabilities. Even so, most companies follow these basic steps for calculating accrued payroll. Adjust as necessary for your business.

1. Calculate the gross outstanding payroll. Payroll teams multiply the hourly rate by the hours worked to calculate accrued payroll. Salaried workers may accrue a prorated amount. For example, Carol has accrued roughly $625 for the first week of March. She has an unpredictable work schedule, so the HR person divides her monthly paycheck into four parts.
2. Add additional pay, such as overtime, commissions, and bonuses. Payroll specialists must adjust the gross pay to reflect all additional sources of income from the company.
3. Calculate corporate FICA liabilities and costs. Employees' gross wages include the amount paid to tax agencies. Consequently, companies only need to calculate their additional contributions on behalf of workers. Examples include Social Security, Medicare, federal unemployment tax, state unemployment taxes, and state disability insurance.
4. Calculate benefits contributions. Employees' gross wages include retirement contributions, garnishment deductions, and benefits payments. Consequently, the company only needs to calculate its portion of benefits provided.

Example of how to calculate accrued payroll costs for an employee

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This article is intended for educational purposes and should not be viewed as legal or tax advice. Please consult a professional to find the solution that best fits your situation.