Accrued payroll refers to all forms of payroll compensation that a business owes its employees but has not yet paid out. 

Accrued payroll describes how much a business owes in payroll or its payroll liabilities. Accrued payroll allows organizations to record expenses that are still pending, including wages, payroll taxes, benefits, and any other debts or liabilities related to payroll that the business has not yet paid. 

Businesses use accrued payroll to track and record outstanding expenses over time, understand liabilities, control budgeting, and forecast financial planning.

Accrued payroll vs. accrued wages

Accrued wages are the accumulated salary an employee earned during a pay period that their employer still needs to pay out to them. Accrued wages are just one example of the types of compensation included in accrued payroll. 

Accrued payroll includes all types of compensation that a business has not yet paid out to its employees. Accrued payroll includes accrued wages and other payroll types such as bonus pay, commissions, paid time off, payroll taxes, and employee benefits

Accrued payroll vs. cash accounting

Cash accounting is a method by which transactions are only recorded when cash comes in or out. It is a simpler method of accounting compared to accrued payroll, which records pending payroll expenses that the business hasn’t paid yet. 

However, because cash accounting shows an incomplete and delayed picture of an organization’s overall finances, it does not capture the financial situation as accurately as accrual payroll accounting. 

Types of accrued payroll

Accrued payroll includes all payroll expenses included in a company’s global compensation strategy. The key types of accrued payroll include the following:

  • Salaries and wages. Employees' wages are considered a liability until their employer pays them. Employee wages and salaries are typically the largest source of an organization’s accrued payroll. A business might hold accrued payroll liabilities in invoices from contractors and uncashed employee paychecks. 
  • Commissions and bonuses. Any commissions or bonuses an employee receives in addition to their regular compensation during a pay period qualify as expenses in accrued payroll. 
  • Paid time off (PTO). Paid leave regulations vary by country and jurisdiction. However, a business generally owes employees the value of their paid time off, even if they don’t take time off during a pay period. In these circumstances, employers must record PTO in accrued payroll. Employees who decide to leave the company are typically owed the value of their paid time off in their final paycheck. 
  • Income tax and payroll taxes. The employer is responsible for withholding income and payroll taxes. For example, in the U.S., an employer must account for federal income, Social Security, Medicare, and unemployment taxes to remain compliant with the IRS.
  • Employee benefits. Employee benefits such as annual leave, parental leave, pensions,  and healthcare contributions must be accounted for in accrued payroll. 

How to calculate accrued payroll

Calculate accrued payroll by adding up all of an employee’s outstanding payroll liabilities: 

  1. First, calculate employee wages. Determine the number of hours an employee worked that they have not been paid for and multiply that by their hourly wage. 
  2. Next, add in supplemental pay. Supplemental pay accounts for extra wages such as bonuses, commissions, and overtime pay. 
  3. Then, add in employer contributions. These are the benefits and taxes an employer pays on behalf of their employees, such as payroll taxes, social security, pensions, unemployment, and health insurance contributions.
  4. Finally, factor in the employee’s accrued paid time off. If applicable, add the employee’s earned paid time off and earned leave days they are entitled to for the pay period.

In summary, calculate an employee’s total accrued payroll using the following formula:

(Hours worked x hourly wage) + (supplemental pay) + (payroll taxes + employer contributions) + (PTO)

Once you calculate each employee’s accrued payroll, add together the sums of all employees’ accrued payroll to find the total amount of accrued payroll expenses for a given pay period. 

Read also: How to Calculate the Cost of an Employee

Accrued payroll example

Let’s look at an example for calculating accrued payroll:

A sales company pays its employees once every two weeks based on their hours worked. A sales representative receives $30 an hour and works 40 hours weekly. The sales rep earned a $300 commission and a $500 performance bonus during the current pay period. 

Additionally, the sales rep earned two days of paid time off for the current pay period. Plus, the employer owes $600 in payroll taxes and contributions for the employee.

The sales representative’s payroll accrual for the current pay period would include the following:

 

Gross pay:$30 x 40 hours x 2 weeks = $2,400
Commission and bonuses:$300 + $500 = $800
Employer contributions:$600
PTO:$30 x 16 (2 8-hour days) = $480
Accrued payroll:$4,280

 

Once the sales company calculates the accrued payroll for each employee, it will have its total accrual payroll amount for the current pay period.

The importance of accrued payroll

Accrued payroll is a valuable method for finance teams to track employee expenses. It gives an organization an accurate understanding of its overall money flow in any given period. 

Businesses also know what they owe to employees and can better allocate payments, reduce unexpected costs, and plan better for the future. 

Accrued payroll helps businesses with the following factors:

  • Avoid unexpected expenses. Accrued payroll keeps cash flow transparent. Wage expenses are recorded as labor is performed, rather than when the paycheck goes through. Businesses avoid surprises when employees cash multiple paychecks at once or take time off. 
  • Prevent accounting mistakes. Accrued payroll minimizes human error. Businesses calculate wage expenses in advance, ensuring they record them accurately and mitigate accounting errors. Accrued payroll also ensures global payroll compliance for companies hiring and paying employees in multiple countries where employment laws and payroll processes differ.
  • Improve budgeting. Accrued payroll facilitates better financial planning. Businesses keep track of current and incoming expenses, which gives them a better understanding of the overall cash flow. Accrued payroll ensures they have the necessary funds available to pay employees, run a business, and make better financial decisions without worrying about pending liabilities.

 

Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is" and Velocity Global makes no representations or warranties concerning this information.

 


 

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