How Payroll Shows Up in Your Books: Wages, Withholdings and Employer Costs

Gross pay and take home pay

Gross pay is the full amount your worker earned for the pay period. If a worker earns a set rate per hour, gross pay is the hours times the rate. If a worker is on salary, gross pay is the pay for that period. Gross pay is the top number before anything comes out.

Take home pay is what is left after the withholdings come out. Take home pay is the number the worker sees on their check. It is also the number that leaves your bank on pay day. The gap between gross pay and take home pay is the withholdings.

In your books, gross pay goes on a wages line. The wages line shows the real cost of the person's time. The take home pay is the cash that leaves the bank. The withholdings sit in the middle, and they have their own lines too.

Here is the simple split.

• Gross pay is the full amount earned.
• Withholdings are the amounts taken out.
• Take home pay is what the worker gets.

Your CPA decides the accounting method and we keep the books consistent with it. The point is to use the same method every time so the books and the bank agree.

Withholdings are money you hold for others, not your expense

Withholdings are amounts taken out of the worker's pay. They are not your expense. They are money that belongs to the worker, to the tax agencies, or to others. You take them out of the pay and you hold them until they are sent on.

The common withholdings are income tax, social security and medicare amounts taken from the worker. There can be others too, like amounts for a retirement plan or a garnishment. Each one is held for someone else.

This is the part owners get wrong. They see the cash leave the bank and they think the whole amount is a wage expense. It is not. The wage expense is the gross pay. The withholdings are a holding account. When you send them to the agencies, the holding account goes down. Your expense does not change.

Here is how to think about withholdings.

• Withholdings come out of the worker's gross pay.
• They are not your expense.
• They sit in a holding spot until they are sent.
• When you send them, the holding spot goes down.

Dates and rules change. Confirm the exact withholdings that apply to you with your payroll provider, your CPA, or the agency.

Employer costs on top of wages

Employer costs are amounts you owe on top of the wages. They do not come out of the worker's pay. They are your cost as the employer. The common ones are the employer share of social security and medicare, and state and federal unemployment amounts.

These costs add to the real cost of having the worker. If a worker earns a set amount in gross pay, the real cost to you is more than that amount once the employer costs are added. Many owners are surprised by this the first time they run payroll.

In your books, employer costs go on their own lines. They are a wage type expense, but they sit apart from the gross wages line so you can see the full picture. When you look at your reports, the wages line plus the employer cost lines add up to the real cost of your people.

Here is what counts as an employer cost.

• The employer share of social security and medicare.
• State unemployment amounts.
• Federal unemployment amounts.
• Other employer paid items your setup may have.

Ask your payroll provider what employer costs apply to your setup. They vary by state and by the kind of work.

The payroll liability accounts in plain words

A liability account is a holding spot in your books. It holds money that belongs to someone else until you send it on. Payroll creates several liability accounts.

When a pay run happens, the withholdings go into liability accounts. The employer costs may go into a liability account too. These accounts hold the amounts until the day you send them to the agencies. On that day, the cash leaves the bank and the liability accounts go down.

The key idea is that the liability accounts are not expenses. They are holding spots. The expense is the gross wages and the employer costs. The liability accounts just hold the amounts that are on their way out the door.

Here is what the liability accounts hold.

• The income tax taken from the worker.
• The social security and medicare amounts, worker and employer.
• The state and federal unemployment amounts.
• Any other amounts held until they are sent.

Your CPA decides the accounting method and we keep the books consistent with it. When the books are clean, the liability accounts match what you still owe, and the cash that left the bank matches what you sent.

What a clean pay run looks like in your books

A clean pay run has a few moves that all happen at once. The gross wages go on the wages line. The withholdings go into the liability accounts. The employer costs go on their own lines and may also go into a liability account. The take home pay leaves the bank.

Later, when you send the withholdings and the employer costs to the agencies, the cash leaves the bank and the liability accounts go down. At that point the liability accounts should be back to zero, or close to it, until the next pay run.

Here is what a clean pay run shows.

• Gross wages on the wages line.
• Withholdings in the liability accounts.
• Employer costs on their own lines.
• Take home pay leaving the bank.

And here is what a clean send shows.

• Cash leaving the bank for the amounts sent.
• Liability accounts going down by the same amounts.
• No wage expense added a second time.

We are QuickBooks Online Accountants, or QBOA, and we work in QuickBooks Online and Xero. We keep the payroll lines in the same software your books live in.

Made up example for teaching

A small shop with one worker

A small shop has one worker for the pay period. The numbers below are made up and round so the math is easy to follow. They are not real rates or real rules. Confirm the real amounts with your payroll provider or your CPA.

Gross pay for the period is one thousand dollars. The withholdings taken from the worker are two hundred dollars. The take home pay is eight hundred dollars. The employer costs on top of the wages are one hundred dollars.

In the books, the wages line goes up by one thousand dollars. The withholdings go into a liability account for two hundred dollars. The employer costs go on their own line for one hundred dollars, and they also go into a liability account. The cash that leaves the bank on pay day is eight hundred dollars, the take home pay.

Later, the shop sends the withholdings and the employer costs to the agencies. Three hundred dollars leaves the bank. The liability accounts go down by three hundred dollars. The wage expense does not change. The books and the bank agree.

The owner uses their own payroll provider to run the pay, take out the right amounts, send the pay checks, and send the filings. We keep the books. Each line lands where it belongs, and the close that month is just a sum.

This is a made up example for teaching. Your numbers and your setup are your own. Confirm the dates and rules that apply to you with your payroll provider, your CPA, or the agency.

Common questions

What is the difference between gross pay and take home pay? Gross pay is the full amount earned. Take home pay is what is left after the withholdings come out. The gap between them is the withholdings.

Are withholdings my expense? No. Withholdings come out of the worker's gross pay and are held for others. Your expense is the gross wages and the employer costs.

What are employer costs? Employer costs are amounts you owe on top of the wages, like the employer share of social security and medicare and unemployment amounts. They add to the real cost of having the worker.

Do you run the payroll? We offer monthly payroll with pay runs every pay period, pay checks, filings and a clean tie to your books. You can read more on our payroll page or reach us on our contact page.