There seems to be great confusion in this area. Since most businesses use a payroll service such as ADP or PayChex this example is presented with that in mind. This is the simplest method and avoids many of the problems frequently seen such as negative payroll liabilities and multiple posting to liability accounts such as employee health insurance payable and employee 401(k) payable.

Services take out one bank draft for salaries and one for taxes hence we do so here to mirror the transaction as it shows on the bank statement. It is always best practice to have the general ledger match the bank account statement.

The goal is to “build” the net pay up to the gross pay so any deductions from an employee’s check are added back to salaries expense.

Note employee deductions such as health insurance are treated as a negative expense. This saves having to track a liability account such as employee health insurance payable. In the above example assume you have two payrolls a month with the same deductions and your health insurance bill is $2,500 monthly. You will show a next expense of $1,500 ($2,500 less two $500 payroll journal postings) without using a separate liability account.

As a rule do not keep accounting detail in two places. If you want to know someone’s earnings year to date consult the payroll reports from your service provider as it is the definitive source. There is no need to store that level of detail in the accounting software too and create another point of reconciliation. In the same vein there is no need for separate tracking of all the myriad payroll taxes in the general ledger. Again, refer to payroll service’s reports if you need specifics.