Journal Entry for Payroll Deduction

Payroll deduction is the amount that company deducts from the employee’s payroll before making the payment to them.

The payroll deduction includes withholding tax on salary, 401k accounts payable, federal withholding tax, and so on. These are the items that are usually included in the payroll deduction. It happens when the company has to deduct the payroll amount from employees and paid to a third party such as a tax authority, the federal government, pension plan administrator, and so on.

Due to these deductions, the employees will receive less money than the agreed amount between them and company.

The company will record payroll expenses based on the amount they paid which is the gross amount. However, part of the gross amount is detected by the third parties which have mentioned above.

The employees only receive the net amount left after the deduction. This is the final amount that they take home.

So we can see the gap between what the employer paid and the amount employee receive. The difference will be recorded based on the nature of each deduction.

The employer has the obligation to deduct the difference and make payments to third parties such as tax authority, the federal government, and the pension fund manager.

Journal Entry for Payroll Deduction

At the end of the month, the company is required to pay the payroll to the employees. They have the obligation to deduct the payroll from employees and pay to the third party later. The deduction has to do base on the law and regulations of the country.

At the same time, company also prepare the monthly income statement which must include all revenue and expense that incurs during the month. Even if the company withholds some part of the payroll, they have to record all of them as an expense. The deducted amount of payroll will be recorded as the current liability and required to settle based on the agreed term.

The journal entry is debiting the payroll expense of the gross amount. The credit side will include the payable to deducted amount and cash paid.

The payroll expense is the gross amount that company and employee have agreed upon.

401k payable is the payroll deduction that represents the amount of cash that an employee has to contribute to the pension plan.

Salary Tax Payable is the amount of salary tax that employee has to pay to the tax authority. Instead of paying directly, company plays a role as the middleman to withhold from employees and pay to the tax authority.

Cash credit balance is the amount that employee will receive from company. It is the amount that company pays directly to each employee through bank account or cash on hand.

Example

Company ABC has 10 employees and the salary for each of them is $ 2,000 per month. It is the gross amount that needs to deduct the following items such as:

• Salary tax is $ 100 per month which company needs to deduct from employees and pay to tax authority.
• 401k pension payment of $ 200 which company needs to deduct and pay to the pension plan manager.

Please prepare the journal entry for payroll deduction.

Company ABC has to record payroll expenses of $ 20,000 ($ 2,000 x 10 employees). It will be present on the current income statement. But they have to deduct some items to pay to the third parties such as:

• Salary tax payable: $ 100 x 10 employees = $ 1,000 and it will be recorded as the current liability on the balance sheet.
• 401k payable: $ 200 x 10 employees = $ 2,000 and it will be recorded as the current liability as well.

The net amount that all employees going to receive will equal to $ 17,000 ($ 20,000 – $1,000 – $ 2,000).

The journal entry is debiting payroll expense $ 20,000 and credit Salary tax payable $ 1,000, 401k payable $ 2,000 and cash paid $ 17,000.

The payroll expense will be recorded on the current income statement. The 401k payable will present as the current liability until it is paid to the pension fund manager. The same for salary tax which will be on the balance sheet until the company paid to tax authority.

The cash will be transferred to the employees’ bank accounts.