Payroll is one of the most important — and most misunderstood — areas in accounting. Many business owners believe payroll is simply the salaries paid to employees, but from an accounting and tax perspective, payroll includes expenses, liabilities, and compliance responsibilities that must be handled correctly.
Payroll Is Not Just Salaries
From an accounting perspective, payroll includes:
Gross wages
Employee tax withholdings
Employer payroll taxes
Net pay
One of the most common bookkeeping mistakes is recording net pay as payroll expense. This is incorrect and can cause financial statements to be misstated.
Payroll Expenses vs Payroll Liabilities
It is very important to understand the difference between expenses and liabilities in payroll.
Payroll Expenses:
Gross wages
Employer payroll taxes (Social Security, Medicare, FUTA, SUTA)
Payroll Liabilities:
Federal income tax withheld
State income tax withheld
Social Security payable
Medicare payable
Unemployment taxes payable
Net pay (Payroll Clearing account)
Employee tax withholdings are not an expense. This money belongs to the IRS and state agencies until it is paid. The business is responsible for remitting these taxes.
What Is Payroll Clearing?
Payroll clearing is a temporary liability account used to record net pay before it is paid to employees. Once payroll is paid, the payroll clearing account should return to zero. This account helps reconcile payroll and ensures payroll is recorded correctly in the financial statements.
Payroll Tax Reporting
Businesses must file and report payroll taxes regularly. The most common payroll tax forms include:
Form 941 – Quarterly federal payroll taxes
Form 940 – Annual federal unemployment tax (FUTA)
State payroll tax returns – Quarterly
W-2 forms – Annual employee reporting
These reports must match the payroll recorded in the accounting system.
Payroll Risks
Payroll taxes are considered “trust fund taxes” by the IRS. If payroll taxes are not paid, the IRS can assess the Trust Fund Recovery Penalty, which can make the business owner personally responsible for the unpaid taxes.
Final Thoughts
Payroll is more than just paying employees. It affects your financial statements, your tax liability, and your risk as a business owner. Proper payroll accounting helps business owners stay compliant, reduce risk, and make better financial decisions.
At ALP Accounting Services, we don’t just prepare taxes — we help businesses understand their numbers.