August 16, 2022
What is accrued payroll?
What are the different types of accrued payroll?
Why should businesses track their payroll accrual?
How to calculate accrued payroll
Accrued payroll: Key takeaways
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Strategic budgeting and solid financial planning are two key factors for business success. This includes always keeping track of revenue streams and expenses, including payroll liabilities. Since payroll expenses represent a major share of a company’s overall costs, knowing how much you owe your employees at any given moment of the pay period is crucial.
One way of tracking outstanding payroll costs is to calculate accrued payroll. But what exactly is payroll accrual? Why should businesses track their accrued payroll? And how are accrued payroll liabilities calculated?
Accrued payroll (also known as payroll accrual) is the accumulated amount of salaries, wages and other compensation your employees have earned during a pay period, but which still needs to be paid out to them. In this sense, payroll accrual describes your business’s payroll liability, i.e. how much you owe in payroll.
In addition, the term accrued payroll can also refer to an accounting method which is used to track and record outstanding payroll expenses for better cost control and budgeting. In other words: Payroll accrual is the process during which you add up all your payroll liabilities. Knowing your accrued payroll liabilities allows you to avoid any unwanted surprises at the end of the pay period.
In this context, you often come across the term accrual accounting. Accrual accounting is a form of accounting where businesses basically record pending expenses that haven’t been paid yet, as well as incoming payments that haven’t hit the company’s accounts yet.
This is also the main difference between accrual accounting and cash accounting which only records and takes into account revenue and expenses that have actually been deducted or credited to the company’s bank account.
When talking about accrued payroll in terms of a company’s payroll liabilities, it’s important to know that payroll accrual isn’t just limited to accrued salaries and wages. Instead, accrued payroll refers to all payroll expenses a business incurs as part of their employee compensation strategy.
Here are the different types of payroll accrual businesses should consider when calculating their payroll liabilities:
Salaries and hourly wages (this refers to gross pay)
Bonuses (e.g. 13th salary)
Income tax and accrued payroll taxes (federal and state income tax, employer-paid payroll taxes and more)
Social security contributions (pension insurance, health insurance, unemployment insurance and more)
You may wonder why it’s important to account for paid time off in accrued payroll. One of the reasons why payroll accrual should also take into account expenses like PTO is that you’ll have to pay out earned (but unused) annual leave days to employees who decide to leave the company.
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We’ve already talked about the difference between accrual accounting and cash accounting. Since the latter only accounts for cash transactions coming in or out of the business’s bank balance, it doesn’t capture the company’s financial situation as accurately as accrual accounting. However, since accuracy and transparency are crucial when it comes to payroll expenses, businesses should know where they stand with their payroll at any given moment of the month. This is where payroll accrual comes into play.
Payroll is a major part of a company’s monthly expenses. Businesses that don’t keep track of their payroll liabilities risk being surprised by an unexpectedly high payroll sum at the end of the payroll run. Especially in months where the business has faced many other expenses, funds have often dried up by the time payday comes around, which means the business has to go into an overdraft to pay its employees. Payroll accrual can help prevent overdraft since the business knows exactly what they owe in payroll for that particular month.
Similarly, accrued payroll facilitates better financial planning. If the management knows which payroll expenses to expect for a given pay period, they can simply deduct that amount from the available funds and draw up a budget for other projects and investments with confidence, because they don’t have to worry about pending payroll liabilities.
In addition to improving budgeting and financial planning, payroll accrual can be used to reduce errors in payroll. In order to calculate accrued payroll, payroll expenses are determined in advance, which includes the calculation of salaries, wages, taxes and more. Making these calculations upfront instead of last minute makes payroll errors less likely.
Another way to reduce errors in your monthly payroll run is to use a global payroll platform like Lano. Forget about spreadsheets and manual data handling and receive consolidated payroll data for your global team on one single screen thanks to automated data flows. Book a demo to find out more.
Calculating payroll accruals basically means adding up all outstanding payroll liabilities for each employee - and then, of course, adding up those sums to determine the total for the whole of your staff.
As we’ve seen before, accrued payroll includes different elements related to employee compensation. In order to determine what you owe your employees for a given pay period, you have to take all these different elements into account. Here are the different steps you need to follow for each employee.
First, you need to determine how much you owe your employee in wages. To do so, multiply your employee’s (gross) hourly wage with the number of hours worked during the pay period for which you want to calculate accrued payroll.
For instance, if you paid your employee an hourly wage of $30 and they worked a 40-hour week with wages being paid once every two weeks, then the outstanding payment for that pay period would be $2,400.
Next, you have to account for bonuses or commissions your employees are entitled to under the clauses of their individual employment contract. These additional pay elements need to be added to the employee’s gross wages.
The same goes for overtime. Overtime usually needs to be compensated with a wage supplement, which is why pay for additional hours needs to be calculated separately. Once you’ve calculated overtime pay, you can add this to the sum of what you owe your employee.
In most countries of the world, social security contributions are shared between employee and employer. While the employee share is already accounted for in their gross pay, the employer share needs to be factored in separately when calculating accrued payroll.
Social security contribution rates vary from country to country, but mostly include premiums for health, long-term care, unemployment, accident and pension insurance of some sort. Calculate your employer contribution to each of these insurances as well as what you owe in employer payroll taxes - if there are any. Again, add the calculated amounts to the gross wages, bonuses and overtime pay.
With every month they work for you, your employees earn a certain amount of paid time off, for example 2 days for each month worked. These earned leave days must be accounted for in your accrued payroll - even if the employee isn’t taking any paid time off during that pay period - because they represent a payroll liability that still needs to be paid.
To wrap up the calculation of your accrued payroll costs, you then simply add your employee’s accrued PTO entitlement to the other payroll liabilities mentioned above, and repeat the process for the rest of your employees.
In this article, we’ve looked at what accrued payroll is, why it’s worth tracking payroll accrual and how to calculate it. Here are some key takeaways to keep in mind:
Accrued payroll is the sum of payroll liabilities a business accumulates during a given pay period.
Payroll accrual doesn’t just include wages and salaries, but also all other elements of employee compensation such as bonuses and employer payroll taxes.
Calculating your accrued payroll costs helps improve your financial planning and budgeting.
To calculate your payroll accrual, you need to add up your employees’ outstanding hourly wages, salaries, bonuses, commissions, overtime pay, earned but still unused leave days and the amount of employer-paid taxes and social security contributions.
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