Payroll accounting refers to the process of calculating and recording everything involved in paying employees. According to accounting standards:

“Payroll accounting involves tracking employee compensation, withholding taxes and deductions, and recording related employer expenses.”

In simpler terms, it’s all about making sure your employees get paid correctly—and that your books show where every penny went.

Payroll is the total amount a business pays to its employees for their work. It includes gross wages or salaries, which are the amounts earned before any deductions, along with bonuses or overtime pay. From this total, various deductions are made, such as taxes, retirement contributions, and insurance premiums. What remains after these deductions is the net pay—the actual amount the employee takes home. In addition to employee payments, payroll also covers what the employer owes, such as their share of payroll taxes or contributions to employee benefits.

There are a few main parts to payroll accounting that every business needs to understand. First are the earnings, which represent what the employee earns through hourly wages, salaries, commissions, or bonuses. Then come the deductions, which include income tax, social security, retirement contributions, and health insurance—amounts subtracted from the employee’s pay. Employer expenses are the extra costs covered by the employer, such as their share of payroll taxes or contributions to benefits. Lastly, there are payroll liabilities—these are amounts the business owes but hasn’t paid yet, like withheld taxes that must be sent to the government. Each of these components must be recorded accurately in your accounting system to ensure compliance and keep everything organized.

Let’s say you pay an employee a gross salary of $3,000. From this amount, you deduct $300 in taxes, which means the employee’s net pay is $2,700. In your accounting records, the journal entry would be: debit Salaries Expense for $3,000, credit Tax Payable for $300, and credit Cash for $2,700. This entry shows the full salary as a business expense, records the withheld tax as a liability to be paid later, and reflects the actual cash amount paid to the employee.

Payroll is one of the most sensitive parts of accounting. Employees expect to be paid correctly and on time, and the government expects accurate tax reporting. Mistakes in payroll can lead to fines, unhappy staff, or even legal issues. That’s why proper payroll accounting is critical to a smooth-running business.  

✅ Payroll accounting tracks employee earnings, deductions, and employer costs
✅ Gross pay, net pay, taxes, and liabilities must be recorded correctly
✅ Journal entries show both what’s paid to employees and what’s owed to others
✅ Accurate payroll builds trust and ensures compliance with tax laws
✅ Even small payroll mistakes can lead to big problems—accuracy is key!