What is Accrued Payroll an How to Manage it Effectively

What is accrued payroll?

Accrued payroll refers to the total employee compensation a business owes but hasn’t yet paid. This includes wages, salaries, bonuses, commissions, employer payroll taxes, and other forms of employee benefits such as sick pay and paid time off. All of these fall under the umbrella of accrued payroll costs, even if they haven’t been included in a final paycheck.

Since these amounts are still outstanding, they are recorded as accrued payroll liabilities on the company’s balance sheet. Essentially, the business has already incurred the payroll expenses, but the actual cash outflow to pay employees happens later. This is especially important when applying accrual accounting, which requires recognising expenses when they occur—not when cash changes hands.

Accrued payroll facilitates better financial planning, helps track employee compensation, and provides a more complete view of what the business owes during any given accounting period

Importance in financial reporting

Recording accrued payroll correctly is not optional—it’s an essential part of accrual accounting. For HR managers and employers, this ensures:

• Compliance with accounting standards (e.g., GAAP or IFRS)
• A clear picture of payroll liabilities and labour costs
• More accurate financial statements (both the income statement and balance sheet)
• Better insights for forecast financial planning and managing unexpected expenses

By accounting for accrued expenses like unpaid employee wages and employer contributions, businesses avoid distorting their financials with underreported costs.

Components of accrued payroll

Every payslip tells a story—of effort, hours, bonuses, and benefits. Accrued payroll gathers all these elements and stacks them into one figure that reflects what the business owes before payday arrives.

Salaries and wages

This is the core of accrued payroll. It includes:

• Hourly wages: Based on the number of hours worked multiplied by the employee’s hourly wage
• Annual salaries: Prorated according to the relevant pay period

These amounts represent the gross wages employees have earned during a period but haven’t been paid yet.

Bonuses and commissions

If an employee earns a performance bonus or sales commission in March, but payment is scheduled for April, that amount becomes part of the accrued payroll. These are classified as other compensation, and even if variable, they must be tracked and recorded accurately.

Payroll taxes and deductions

Employers must also factor in:

• Employer paid payroll taxes such as National Insurance (UK) or Social Security and Medicare (Federal Insurance Contributions Act in the US)
• Income tax withholdings
• Other deductions like health insurance premiums or pension contributions

All these add to the total accrued payroll liabilities and must be recognised even before actual payment.

Benefits and paid time off (PTO)

Accrued benefits go beyond direct pay. These include:

• Unused holiday leave
• Sick days earned
• Parental leave
• Any health insurance or retirement contributions that have accumulated

Though not always immediately paid out, these benefits form part of employee compensation and must be included in payroll accrual.

How to calculate accrued payroll

Accrued payroll isn’t something you guess—it’s something you calculate. The process requires clear records, consistent methods, and attention to detail.

Identifying the pay period

Start by defining the exact pay period for which you want to calculate accrued payroll. This is typically the final few days of a month or quarter that fall outside the latest payday. Make sure it aligns with the accounting period used for financial statements.

Calculating gross pay for hourly and salaried employees

Here’s a simple breakdown:

Use these figures to calculate each employee's gross pay, forming the foundation of your total accrued payroll.

Accounting for overtime, bonuses, and commissions

• Overtime pay: Usually time-and-a-half or double time. Example: 5 hrs × (£15 × 1.5) = £112.50
• Bonuses and commissions: Add the earned amount even if not yet paid
• These values increase both the gross wages and the accrued payroll costs

Including payroll taxes and other deductions

To complete your calculation, add:

• Employer payroll taxes (e.g., Social Security, Medicare, National Insurance)
• Employer contributions to pension or healthcare
• Other deductions owed to government agencies

These additional amounts are essential when you record accrued payroll, as they reflect the full cost of employment for that period.

Recording accrued payroll in accounting

Tracking payroll is only half the job—knowing how to record accrued payroll in your accounting system is just as crucial. Clear records help businesses stay compliant, pay employees correctly, and avoid messy errors in financial reports.

Journal entries for accrued payroll

To properly reflect payroll expenses before cash leaves your account, you need to make a journal entry at the end of the accounting period.

At the end of the pay period (before payment is made):

When payroll is actually paid:

These entries ensure that gross pay, employer contributions, payroll taxes, and any accrued salaries are properly logged as liabilities and expenses—even if payment happens later.

Impact on financial statements

Accurately recorded payroll accruals have two main effects:

• Balance sheet: Shows wages payable and other accrued payroll liabilities under current liabilities, reflecting what the business owes for the given pay period.

• Income statement: Includes payroll expenses, such as employee compensation, employer paid payroll taxes, and accrued benefits, showing the true cost of labour in that reporting period.

This ensures compliance with accrual accounting and helps track labour costs more precisely.

Legal and compliance considerations

You can’t afford to get payroll wrong. Legal obligations are strict, and getting them wrong can lead to penalties, audits, and loss of employee trust.

Adhering to labor laws in the US and UK

In both countries, employers are legally required to:

• Pay employees on time and in full for hours worked
• Maintain clear records of employee wages, accrued benefits, and deductions
• Adhere to local minimum wage laws and maximum working hours

Late or inaccurate wage payments can lead to employee disputes or even lawsuits.

Tax obligations and reporting requirements

Employers must accurately calculate and report:

• Income tax withholdings
• Federal Insurance Contributions Act (FICA) taxes in the US
• National Insurance contributions in the UK
• Employer payroll taxes, including health and pension contributions

Inaccuracies here may result in fines or audits from government agencies and can affect your company’s standing.

Consequences of mismanaging accrued payroll

Getting it wrong comes at a cost:

• Financial reporting errors that distort the company's financial health
• Legal penalties for non-compliance with tax or labour laws
• Disputes with employees over final paychecks, bonuses, or accrued wages
• Cash flow surprises due to unrecorded liabilities

Common challenges and how to overcome them

Even with a great system, things can go wrong. The key is knowing where problems arise and how to fix them quickly.

Handling discrepancies in work hours

• Use time-tracking tools integrated with your payroll software
• Implement clear policies on breaks, overtime, and time submission deadlines
• Regularly compare logged time with schedules and job outputs

This minimises errors in gross pay and overtime pay calculations.

Managing payroll across different jurisdictions

• Stay up to date on local tax laws and labour regulations
• Use software that supports multi-country payroll processing
• Consider consulting local experts for legal or tax advice

This helps maintain compliance with varying rules around accrued salaries and employee’s accrued payroll.

Keeping up with changing tax rates and regulations

• Subscribe to government updates or payroll compliance newsletters
• Choose systems that auto-update tax tables and reflect new thresholds
• Regularly revisit your payroll processes and run internal compliance checks

How Shiftbase simplifies accrued payroll management

Accurately managing accrued payroll starts with reliable data on hours worked, time off, and schedules. Shiftbase makes this easier with built-in tools for employee scheduling, time tracking, and absence management. With everything synced in one place, your team can track worked hours, calculate accrued wages, and stay compliant with payroll requirements—without the manual headaches.

Ready to streamline your payroll processes and reduce errors? Try Shiftbase free for 14 days and experience the difference.

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