Accrued Payroll 101: What Employers Need to Know

“Accrued payroll improves cash flow management by showing payroll obligations before payment is made, helping businesses plan liquidity and avoid cash shortages,” explains Raina Heiss, Supervisor, PEO Payroll at Paychex.

Payroll does not always fit neatly within a calendar month, quarter, or year. Your employees may perform work before an accounting period ends but receive their paychecks during the next period. Accrued payroll helps you account for those unpaid payroll costs in the period when employees earned them.

Without an accurate payroll accrual, your financial statements may understate liabilities, place payroll expenses in the wrong accounting period, and make it harder to match labor costs with the revenue and business activity associated with that period. You may also lose visibility into upcoming cash requirements, particularly when payroll represents a significant portion of operating expenses.

Understanding what payroll is and how payroll expenses flow through your books can help you distinguish between compensation you have already paid and compensation your business still owes.

This guide explains what accrued payroll includes, how to complete an accrued payroll calculation, how to record an accrued payroll journal entry, and which common mistakes can create accounting mismatches.

What Is Accrued Payroll? And What Isn’t?

Accrued payroll represents compensation employees have earned for work they already performed, along with related payroll costs the employer has incurred but has not yet paid.

The concept comes from accrual accounting, which generally recognizes expenses when the business incurs them rather than when cash leaves the bank account. For payroll, that means recording labor costs in the accounting period when employees earn.

Consider a company that closes its books on June 30 but pays employees on July 3 for work performed during the final week of June. The company may need to accrue the June portion of those payroll costs even though employees will not receive payment until July.

The accrual generally covers payroll costs employees earned through the accounting period-end date that the business will pay during a later payroll cycle.

Accrued payroll can include several types of compensation and employer expenses.

The precise components can vary based on your accounting practices, compensation programs, benefits, and applicable law.

PTO accrual depends on the leave you offer, not on preference. Accrue leave that employees can carry into the next period or cash out when they leave, as long as you can reasonably estimate the amount. Use-it-or-lose-it leave that disappears at year-end usually does not create an accrual. State law matters here too, because some states require employers to pay unused amounts when employment ends.

Is Accrued Payroll a Current Liability?

Yes. Accrued payroll generally qualifies as a current liability because your business expects to pay the amount within 12 months, and usually much sooner.

Accrued payroll does not qualify as an asset. Your business owes the amount to employees, taxing authorities, benefit providers, or other parties.

The liability remains on your balance sheet until your business pays or otherwise settles the underlying obligation. Understanding how that amount appears on your financial statements can help you see the difference between payroll expenses for the period and cash your business has already paid.

How To Calculate Accrued Payroll

An accrued payroll calculation usually starts with each employee and then rolls those amounts into a companywide period-end total.

A consistent process can help you avoid including payroll from the wrong period or leaving out related employer costs.

Step 1: Determine Unpaid Work Through Period-End

Identify the number of hours or days the employee worked before the accounting period ended but that the next payroll will cover.

For hourly employees, you can generally use actual unpaid hours. For salaried employees, you may allocate salary based on the portion of the pay period that falls within the accounting period.

Step 2: Calculate Accrued Gross Wages

Multiply unpaid hours by the employee's hourly rate.

Assume an employee earns $30 per hour and worked 24 hours before the month-end that the next payroll will cover.

24 hours × $30 = $720 in accrued wages

The company would start its accrual with $720 in unpaid gross wages.

Use gross wages rather than net pay. Gross wages already include what you withhold from the employee for taxes and other deductions, so do not add those amounts again later.

Step 3: Add Other Earned Compensation

Next, add compensation the employee earned during the accounting period but has not yet received. Depending on the employee's compensation arrangement, this amount may include overtime, bonuses, commissions, or other earned compensation.

Assume the employee also earned a $100 commission before month-end.

$720 wages + $100 commission = $820 in accrued compensation

Step 4: Add Employer Payroll Taxes

Your payroll accrual may also need to reflect employer payroll taxes attributable to the accrued wages.

For this simplified example, assume the employer owes its 7.65% FICA share on the employee's $820 in accrued compensation.

$820 × 7.65% = $62.73

The employer's FICA obligation equals $62.73. Assume applicable federal and state unemployment taxes add another $7.27 for purposes of this simplified example, bringing total employer payroll taxes to $70.

The full 7.65% applies only up to a point. The 6.2% Social Security piece stops once the employee hits the annual wage base for the year. The 1.45% Medicare piece keeps going on all wages. Check year-to-date pay before you apply a flat rate.

Federal and state unemployment taxes can vary based on wage bases, tax rates, credits, and the employee's year-to-date wages.

The running total now equals:

$820 compensation + $70 employer payroll taxes = $890

Federal and state payroll tax obligations can add another layer of complexity, particularly when you need to determine which taxes apply to specific compensation. The IRS provides additional information about federal payroll tax responsibilities.

Step 5: Add PTO and Employer Benefit Contributions

Next, add any PTO accrual and employer benefit contributions attributable to the period that your accounting policies include in accrued payroll.

Assume the employee earned $45 worth of PTO during the unpaid period and the employer owes $75 in benefit contributions for the same period.

The calculation becomes:

$890 + $45 PTO + $75 employer benefits = $1,010

The employer's total accrued payroll for this employee equals $1,010.

This example applies employer payroll taxes to wages and commission only. Many employers also add employer taxes to the PTO figure, since those taxes come due when the employee uses or cashes out the leave. Follow whichever approach your accounting policies use, and stay consistent.

“So many people don’t look at their PTO as a huge benefit to an employer, but it really is,” says Cassie Carter, a Senior Associate Payroll Service Specialist, PEO, at Paychex. “It is so important for an employer to include their PTO time given to an employee in their accrued payroll totals. These calculations and wages are a huge expense with their payroll costs.”

Step 6: Calculate Total Accrued Payroll

Repeat the process for each employee with unpaid payroll costs at period-end. Then add the individual totals to determine your company's total accrued payroll liability for the accounting period.

Accurate payroll reports can make this process easier because they provide the wage, tax, deduction, and benefit information that accounting teams need to complete period-end calculations. A consistent process for running payroll can also reduce the number of adjustments required at month-end.

How to Record an Accrued Payroll Journal Entry

After calculating accrued payroll, you need to record the obligation in your accounting records.

A typical payroll journal entry recognizes the payroll expense and the corresponding liabilities.

Using the $1,010 example above, the employer could record the following entries at period-end:

“Including accrued payroll costs in the general ledger is critical to ensuring accurate expense recognition, reliable liability reporting, and sound financial management for your company,” says Cassie Carter, a Senior Associate Payroll Service Specialist, PEO, at Paychex.

The expense accounts reflect payroll costs for the current accounting period. The liability accounts reflect amounts the business still owes.

Your chart of accounts may use different account names or group certain expenses and liabilities together. Your accounting ledgers should use an approach that remains consistent with your company's accounting policies.

Reversing the Accrued Payroll Entry

Many businesses reverse the accrual at the beginning of the next accounting period.

Under this method, the company records an opposite entry on the first day of the new period. The company debits the accrued payroll liability accounts and credits the corresponding expense accounts.

The reversal removes the prior-period accrual before the regular payroll entry posts. This approach helps prevent the company from recording the same payroll expense twice.

For the $1,010 example, the employer would reverse the original entry at the beginning of the next period and allow the actual payroll run to record the final payroll amounts.

Non-Reversing Entries

A company can also use a non-reversing approach.

Instead of reversing the accrual automatically, the company applies the eventual payroll payment against the accrued liabilities. The accounting team then records any difference between the estimated accrual and the actual payroll amount.

This approach can work well, but it requires careful reconciliation. Payroll amounts may change because of overtime adjustments, commissions, benefit changes, payroll taxes, or other items that the business did not know at the time of the original accrual.

Strong payroll accounting practices can help your accounting and payroll teams keep those entries aligned.

Common Mistakes to Avoid With Accrued Payroll

Even a small payroll accrual error can create discrepancies between your payroll reports, general ledger, and financial statements. Several mistakes appear frequently.

Leaving Out Employer Payroll Taxes

Accruing gross wages without related employer payroll taxes can understate both expenses and liabilities.

Best practice: Include applicable employer FICA, FUTA, and state unemployment tax obligations when calculating the accrual. Review wage bases and year-to-date compensation because some payroll taxes stop or change after an employee reaches a statutory wage threshold.

Double-Counting the Employee’s Share of Payroll Taxes

Gross wages already include the employee’s share of payroll taxes. Adding the employee’s FICA on top of gross wages counts it twice and overstates what you owe. You accrue only the employer’s matching share.

Best practice: Start from gross wages, then add the employer share separately. Check the accrual against a payroll register to confirm each portion shows up once.

Overlooking Accrued PTO

PTO can create an additional payroll-related obligation when employees earn leave they can carry over or cash out, and you can reasonably estimate what you will owe.

State laws also vary on how employers must treat unused vacation or PTO, including whether an employer must pay unused amounts when employment ends.

Best practice: Coordinate your payroll accrual method with your accounting policies, PTO policy, and applicable state law. Review leave balances regularly rather than waiting until year-end.

Using Cash-Basis Thinking With Accrual-Basis Books

A common mistake involves recording payroll only after cash leaves the business's bank account even though the company uses accrual accounting.

That approach can shift expenses into the wrong accounting period.

Best practice: Focus on when employees earned the compensation rather than when the company issued payment.

Forgetting the Reversing Entry

A business that records an accrual and then posts its regular payroll expense during the next period without reversing or clearing the original accrual may count the same expense twice.

Best practice: Build reversing entries into your month-end and year-end close procedures, or establish a clear process for applying actual payroll payments against the accrued liabilities.

Skipping Payroll Reconciliation

An accrual can look reasonable while still failing to match payroll source data.

Differences may stem from changed time records, overtime, bonuses, commissions, payroll taxes, benefit deductions, or other adjustments.

Best practice: Reconcile accrued payroll against payroll registers and other source reports every accounting period. Investigate differences rather than carrying unexplained balances forward.

Accruing the Entire Pay Period

The accounting period may end halfway through a payroll cycle. Accruing the full pay period in that situation can overstate expenses and liabilities.

For example, assume a two-week pay period runs from June 24 through July 7. A June 30 month-end accrual should generally capture compensation attributable to June 24 through June 30 rather than the entire two-week period.

Best practice: Calculate the accrual based on the portion of employee compensation that relates to work performed through the accounting period-end date.