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What is a payroll expense? A guide to payroll expenses

What is a payroll expense? A guide to payroll expenses


Payroll accounting begins by comprehending your expenditures, which encompass taxes and obligations as an employer. This comprehensive guide aims to unveil these aspects.


The cost of maintaining employees can be significant, wouldn’t you agree? Beyond just the payroll itself, there are additional expenses to consider.


We’re referring to federal and state taxes, insurance premiums, and other similar financial commitments. These are commonly referred to as payroll liabilities. Let’s delve into the details to grasp how these elements influence your financial statements.

What are employer payroll expenses?

These represent the costs incurred by a business owner in relation to their employees. Two distinct types warrant consideration. Firstly, there are deductions extracted from employee wages. Secondly, there exist payroll taxes and outlays that pertain uniquely to the employer.


The initial classification is termed “withholdings,” given that these costs are subtracted from the gross pay of employees. Let’s begin our discussion with this category.


Withholding Taxes

The withholding taxes are contingent upon your employee’s situation. Upon receiving a W4-form from your employee, you can precisely determine the required tax withholding. Fortunately, reliable payroll software can perform this calculation on your behalf. It’s highly recommended to acquire such software to streamline your processes.


In a general sense, the anticipated withholding taxes encompass:


Federal Income Taxes (FIT)

State Income Tax (SIT)

FICA (Medicare and Social Security)


Benefits Withholdings

When you provide an extensive employee benefits package, this is the stage at which it’s funded – or at least partially. A portion of the benefits’ cost is subtracted from employees’ gross pay. Alternatively, you might have an arrangement in which you cover the entire corresponding cost. For instance, if you offer a 401(k) plan with employer matching, you’d be covering that expense directly.


The withholding of benefits is fully customizable according to your organization’s policies.


Illustrative examples encompass:


Workers’ Compensation Insurance

Health Insurance

Commuter Benefits

Life Insurance

401(k)s or other Retirement Plans


Employer’s Payroll Tax Expenses

Now, let’s delve into the significant contenders: your payroll taxes. To be frank, payroll taxes aren’t excessively steep. Consider the employer’s FUTA tax – Federal Unemployment Tax Act. As of now, the FUTA tax rate stands at 6% for the initial $7,000 in gross income earned by an employee.


That’s quite reasonable! While there might be some slight deviations across states, the primary costs you can anticipate encompass:


FUTA (Federal Unemployment Taxes)

SUTA (State Unemployment Taxes)

FICA (Medicare and Social Security)


Payroll Expenses for Contractors

The primary distinction between engaging contractors and hiring employees pertains to tax withholdings. Contractors are accountable for handling their own tax withholdings. They are responsible for submitting their FICA contributions and managing their individual benefits packages.

In the case of contractors, you remunerate them based on their gross pay, and they assume the responsibility for managing the intricacies of taxation. This arrangement lessens your administrative burden.


How to Calculate Payroll Expenses

1. Make Sure Your Employees Have Completed the W4-Form

As I mentioned, the W4-form holds the key to tax withholdings. Make sure that new employees have a completed W4-form before your next payroll cycle.

2. Define Your Payroll Period

This could be quarterly or even weekly.

3. Use Gross Pay and Deductions to Calculate Net Pay

This is where you deduct withholding taxes and benefits withholdings from gross employee pay. You’ll then get the net employee wages.

4. Create a Payroll Journal Entry for Taxes

Now calculate your contributions. This takes into account the taxable amount of employee wages that you calculated above. You credit FICA, FUTA, SUTA, and any other expenses. Again – don’t feel you have to do this with an Excel sheet. Payroll software will save you.


The process of computing your payroll expenditures might appear intricate initially. However, when you dissect them, the task becomes more straightforward. The utilization of payroll management software can significantly aid in the computation of these taxes on your behalf. Additionally, accounting software can offer assistance. As we conclude, our advice is to avoid grappling with these challenges alone!

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