How to Calculate Accrued Payroll in 2024 [w/ Example]
February 01, 2023
Accrued payroll shouldn’t be a foreign term to you, especially if your business uses the accrual method of accounting.
As your business expands, it is imperative to know how to properly account for your accounts receivables and payables.
Even if your sales are exhibiting stellar results, profits easily slip away the moment you become lax with your payroll and accounting responsibilities.
So how can you maintain your company’s competitive edge without worrying about getting financially blindsided in the long run?
Well, the answer is to learn how to calculate accrued payroll accurately and understand its different types and best practices.
Read this article for more details!
What is Accrued Payroll?
Simply put, accrued payroll encompasses all types of payments or compensation that an employer owes to their workers. Since it is money that employers owe, it is considered a form of short-term liability.
Examples of accrued payroll are salaries or wages, payroll taxes, commissions, and bonuses. The keyword here is that these are expenses that are yet to be paid or received.
In cash basis accounting, a company reports its revenue on its income statement upon receiving the cash payment. Conversely, accrual accounting records revenue and payables before the money is received.
More specifically, it helps create a clear-cut guideline for the company’s expenses and liabilities in the succeeding months or even years. For instance, you are in the business of outsourcing customer support services.
You have agreed to charge your clients on a monthly basis, and this month you were able to generate an income of $1,400. Even though the client has yet to pay, in a few days, you will already have recorded the $1,400 in revenue you’ve earned.
Payroll accruals are typically divided into three different types of payment schedules:
- One-time accrual. This type of accrual is done as needed only and usually requires additional information to verify the amount to be withheld and the purpose for doing so.
- One-time deductions and charges. These apply to bonuses, vacation leaves, fines, and other types of overcharges.
- Periodic accrual. Regarding this accrual payroll type, payments are acknowledged ahead of time. It follows a specific pay schedule, which could either be monthly or bi-weekly when calculating the total amount to be withheld.
Accrued Payroll Liabilities
To calculate your accrued payroll, you’ll have to add up the following liabilities:
#1. Salaries and Wages
Salaries and wages comprise a huge chunk of accrued liabilities. They both refer to the amount that an employer owes their staff for the work or labor completed by the latter in a given pay period.
Both of these liabilities are paid either weekly, bi-weekly, or monthly, depending on the conditions and agreements set forth in the worker’s employment contract.
#2. Payroll Taxes
Accrued payroll tax deductions are subdivided into the following categories:
- State income tax. This tax depends on the state where your business operations are carried out. But, if you are located in Alaska, New Hampshire, Nevada, Wyoming, Tennessee, Floria, South Dakota, Washington, or Texas, you are not required to withhold state income tax from your employees’ wages.
- Federal income. There are no flat rates for federal income taxes because it is based on each employee’s Form W-4, annual income, pay frequency, and filing status. Federal and state income are both categorized as employee-only payroll taxes.
- FICA. This includes Medicare and Social Security Tax. Employers are mandated to withhold these taxes from their employee’s wages. Both employers and employees share equal parts in paying these taxes.
- FUTA/SUTA (Federal/State Unemployment Tax). FUTA and SUTA are both used by the federal government as a source of funds to support employees who have been laid off or lost their jobs due to circumstances that are out of their control.
#3. Paid Time Off
Accruing for PTO will depend on how employees are awarded paid leaves in your company.
Do they get additional leave for every additional year they earn working for your company? Are they required to complete at least 90 working days to qualify for paid leaves?
Calculating employees’ PTO is a must to help you determine how much you owe them in case they quit.
Take note that some time off is not paid. These include sabbatical leave, maternity leave, and any suspension of work caused by natural occurrences. For instance, resort staff cannot work during the winter, so they have to take time off work.
#4. Bonuses
If you offer any type of bonus to your employees, you need to track all cash bonuses that your workers earn in a given pay period. Whether it is an annual, quarterly, or incentive-based bonus, they all qualify as accrued payroll.
How to Calculate Accrued Payroll: Example
Here’s a scenario to help you visualize how to calculate accrued payroll.
Z Solutions is a new company based in California that specializes in web design and development solutions. Bob is a web developer who works at Z Solutions with a fixed hourly rate of $35 per hour. He works 40 hours a week and is paid bi-weekly.
On top of that, he was awarded Employee of the Month for his exemplary work performance and is entitled to a $75 bonus to be included in his earnings for the next pay period.
#1. Calculate the Salary
First, let’s calculate Bob’s earnings for one pay period. He is scheduled to receive his salary on January 13. He will receive payment that covers the work he rendered from December 19 2023 up to January 1 2024.
If Bob works 40 hours a week, then he dedicates 8 hours of work per day. Discounting the weekends from December 19 to January 1, he has accumulated a total of 64 work hours.
Multiplying Bob’s hourly rate by the number of hours he has worked would equal $2,240 ($35 hourly rate X 64 hours worked).
#2. Add the Bonus
Bob was awarded a $75 bonus for being the employee of the month. Add that to his $2,315 earnings, and the company now has accrued $2,315 in gross wages to be paid on the 13th of the month.
#3. Taxes
Let’s apply the 2.9% FICA tax rate, which is divided between Bob and his employer. For his Federal Tax, let’s assume he falls within the wage bracket for single employees with standard withholding and follows a bi-weekly pay period. His State Income Tax is based on California’s state tax rates and brackets.
Payroll Taxes (Employee’s Share) | |
|---|---|
FICA (Medicare) | $33.57 |
FICA (Social Security) | $143.53 |
Federal Income Tax Withholding | $214 |
State Income Tax Withholding | $23.15 |
Insurance Premiums | $30 |
TOTAL | $444.25 |
If we subtract Bob's total share of payroll taxes from his gross pay of $2315, his net pay will be $1870,75.
Payroll Taxes (Employer’s Share) | |
|---|---|
FICA (Medicare) | $33.57 |
FICA (Social Security) | $143.53 |
FUTA | $210.00 |
SUTA | $105.00 |
Employer’s share of Insurance Premiums | $100 |
SUTA rates in California range from 1.5% to 6.2%. Since Z Solutions is fairly new in the market, it is just fitting to apply the lowest rate, which is 1.5%.
#4. PTO
Z Solutions grants their employees 80 hours of PTO and 9 paid holidays per year.
- Calculate the total number of possible work hours for the year. Since Bob works 40 hours a week: 40 hours/week x 52 weeks = 2,080 work hours for the year.
- Subtract the 80 hours of paid time offalong with the 9 paid holidays from the total yearly work hours. 2,080 work hours for the year—80 PTO hours—72 paid holiday hours = 1,928 work hours.
- Divide the total number of PTO hours that Bob can accumulate in a year by the total number of work hours. 80 PTO hours/1,928 work hours = 0.0415 hours.
Z Solutions accrues 0.0415 hours’ worth of PTO (or $1.45) for every working hour that Bob completes.
Accrued Payroll Best Practices
Now that you know all about accrued payroll, here are some tips to keep in mind when calculating it:
- Prepare reminders and notifications to stay on schedule. Missing a pay period or tax deadline is a huge no-no. It will cause a ripple effect of negative consequences for your business and your employees’ earnings.
- Maintain an organized and consistently updated record of all employee data. In doing so, you can classify each of your employees correctly and identify which of your staff are eligible for specific benefits.
- Prepare a handbook that you and your staff can use as a guide. Your handbook should be complete with all payroll management instructions, policies, and procedures.
- Double-check everything once you’re done to make sure you haven’t missed any numbers. A minor error could cost you big bucks later on.
Final Thoughts
A responsible employer makes it a point to keep their accruals in check at all times. It’s one of the best ways to regulate business expenses, ensure all employees are properly compensated, and settle all taxes and benefits on time.
Furthermore, understanding how payroll accrual works can effectively save your business from bankruptcy.
Key Takeaways
- Accrued payroll refers to the payment that an employer owes to their employees.
- It consists of classifications such as salaries and wages, payroll taxes, paid time off, and bonuses.
- In calculating accrued payroll, you must take into account the salary rates of each employee, their payroll taxes, along with bonuses and PTO.
- Some payroll taxes, such as state or federal income tax and SUTA, depend on the state where the business is located, form W-4, pay frequency, filing status, etc.
- Adopt a systematic and well-regulated payroll process so that you pay your employees and taxes on time and minimize errors in your calculations.
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