Accrued Payroll: Definition, Calculation & Examples

Your employees worked the last week of December, but payday isn't until January. So which month should those wages appear in your books?

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This is where accrued payroll comes in. It ensures wages and related costs are recorded when employees earn them, even if payment comes later. Getting it right is important at month-end and year-end, when a few days of unpaid wages can affect your financial statements. A month-end close checklist helps make sure it isn't missed.

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And while calculating those unpaid wages is relatively straightforward, things can get complicated when payroll taxes, employee benefits, and pay periods cross into the next month or year. Understanding how to account for each of these helps you keep your financial records accurate without recording the same expense twice.

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[tldr]

What is accrued payroll?

Accrued payroll is the amount a business owes employees for work they've already completed but hasn't paid for yet. 

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Under accrual accounting, you recognize wages and related costs in the period employees provide the service, not the period cash settles. That matching is what accrual accounting demands, and for many companies payroll is one of the largest recurring accrued expenses on the books.

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Let's say employees work the final few days of December 2026, but their next payday falls on January 8, 2027. Although they won't receive the money until January, the wages they've earned through December 31 belong in December's financial statements.

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The company records those unpaid wages as an expense and a corresponding liability at year-end. When payroll is processed in January, the liability is cleared without recording the December expense again.

What is included in accrued payroll?

Accrued payroll is not just unpaid wages. It covers every compensation-related obligation you owe for work already performed as of the reporting date. 

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Depending on its compensation arrangements, accrued payroll can include:

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• Wages and salaries: Regular pay employees have earned through the reporting date, including unpaid hourly wages and prorated salaries.
• Bonuses and commissions: Incentive compensation earned but not yet paid, such as a year-end performance bonus or commission on a completed sale.
• Employer payroll taxes: The employer's share of Social Security, Medicare, and applicable federal and state unemployment taxes associated with payroll costs.
• Retirement contributions and benefits: Employer-funded costs, such as 401(k) matching contributions and eligible employee benefits.
• Accrued paid time off (PTO): The value of unused vacation or other paid leave that meets the four accrual conditions in ASC 710-10-25-1: the right comes from services already rendered, it vests or accumulates, payment is probable, and the amount can be reasonably estimated ^[1].

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One important distinction is that employee deductions aren't additional payroll expenses.

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For example, imagine you have an employee named Matt who earns $5,000 in gross wages. That amount already includes the portion eventually withheld for income taxes, Social Security, or retirement contributions. 

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Adding those deductions to the original $5,000 would double-count the expense. Instead, employee withholdings are accounted for separately when payroll is processed.

How to calculate accrued payroll

The starting point for calculating accrued payroll is determining how much compensation employees earned before the reporting period ended.

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For salaried employees whose compensation accrues evenly over a pay period, you can estimate unpaid wages using this formula:

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Accrued wages = (Days earned in the reporting period ÷ Total days in the pay period) × Gross wages for the pay period

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You then add the applicable employer payroll taxes, benefits, and any other compensation obligations earned during the period.

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Let's work through a year-end payroll example:

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A company has a biweekly payroll of $70,000 covering December 22, 2026, through January 4, 2027. Employees will be paid on Friday, January 8, but the accounting team needs to determine how much payroll expense belongs in December.

1. Calculate unpaid wages and salaries

Because the pay period crosses year-end, the company needs to allocate wages between December and January.

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There are two common ways to approach this:

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• Calendar-day method: The pay period covers 14 calendar days, with 10 falling in December. Accrued wages are $70,000 × (10 ÷ 14) = $50,000.
• Paid-workday method: The period contains 10 weekdays, with 8 falling in December. If all weekdays count as paid days, accrued wages are $70,000 × (8 ÷ 10) = $56,000.

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The appropriate method depends on how employees earn their compensation. The workday calculation must also reflect the company's treatment of paid holidays. 

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For example, excluding both Christmas Day and New Year's Day as unpaid days would leave 7 December workdays out of 8 total, producing a different allocation.

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For the rest of this example, we'll use the calendar-day method and assume compensation accrues evenly throughout the 14-day period. That gives us $50,000 in December wages and leaves $20,000 attributable to January.

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For hourly employees, use actual hours worked through December 31 rather than dividing the payroll evenly. Timesheets and approved pay rates will give you a more accurate figure.

2. Calculate employer payroll taxes

Wages aren't the only payroll cost a business needs to accrue. Employers may also owe Social Security, Medicare, and applicable unemployment taxes associated with those wages.

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For most U.S. employees, employers need to account for several payroll taxes, with the employer's FICA rates set in section 3111 of the Internal Revenue Code ^[2]:

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• Social Security: 6.2% of taxable wages, up to the annual wage base.
• Medicare: 1.45% of taxable wages, with no wage base limit.
• FUTA and SUTA: Federal and state unemployment taxes, calculated using applicable rates and employee-level wage limits.

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Here's an important distinction for year-end payroll: payroll taxes generally follow the calendar year in which wages are paid, even when the wages were earned in an earlier year, because Treasury regulations treat wages as paid when they are actually or constructively paid ^[3].

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In our example, employees earn $50,000 in December 2026, but their payroll is paid on January 8, 2027. The company therefore estimates the related employer taxes using the applicable 2027 payment-year rules.

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For simplicity, assume all $50,000 is subject to the full 7.65% employer FICA rate when paid.

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Estimated employer FICA = $50,000 × 7.65% = $3,825

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The company would therefore include an estimated $3,825 in employer FICA expense in its December payroll accrual.

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This calculation excludes FUTA and SUTA to keep the example manageable. In practice, accountants must evaluate those taxes separately using employee-level payroll records, applicable wage bases, and state-specific rates.

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The $3,825 is an illustrative accrual, not a substitute for the actual payroll tax calculation. Any difference between the estimate and the amount determined when payroll is processed should be reviewed and adjusted.

3. Include other accrued compensation

The final step is to account for any additional compensation costs employees have earned but the company hasn't yet paid.

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These can include employer retirement contributions, bonuses, commissions, and benefits that qualify for accrual.

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Let's assume the company contributes an amount equal to 3% of gross wages to employees' 401(k) plans, and all wages in our example qualify.

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Accrued 401(k) contribution = $50,000 × 3% = $1,500

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Bonuses and commissions may also need to be recorded separately. For instance, if employees earned $25,000 in commissions during Q4 that won't be paid until February, the company may need an additional year-end accrual for those commissions. That amount is separate from the biweekly payroll example we're calculating here.

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We can now bring the December payroll costs together.

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The company would record $55,325 in payroll-related expenses and liabilities as of December 31, 2026, under these assumptions.

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This total excludes unemployment taxes and any additional employer benefits or variable compensation not included in the example.

Accrued payroll journal entry example

Now that we've calculated the $55,325 payroll accrual, the next step is to record it in the general ledger.

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As of December 31, the company has incurred payroll costs that haven't yet been paid. Under accrual accounting, those costs must appear in December's financial statements, along with the corresponding liabilities.

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The journal entry is straightforward: debit the relevant expense accounts and credit the amounts payable.

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Journal entry: December 31, 2026

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This entry recognizes $55,325 in December expenses, even though the payroll won't be paid until January.

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Notice that the wages, employer taxes, and benefits are recorded in separate liability accounts. Keeping them separate makes it easier to compare the accrual with payroll reports and investigate any differences after payment.

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For example, if the wages match the payroll register but the employer tax estimate differs from the actual amount, accountants can identify and adjust the tax component without reopening the entire calculation.

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This also makes the payroll ledger easier to review and reconcile during month-end close.

How to reverse accrued payroll journal entries

Recording accrued payroll in December solves one problem, but it creates another that needs attention when employees are paid in January.

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If the company records the entire payroll as a new expense in January without addressing the December accrual, it will count part of the same payroll twice.

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That's why many accounting teams use reversing entries.

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A reversing entry cancels the previous month's accrual at the beginning of the new reporting period. The regular payroll can then be processed using the company's usual accounting workflow.

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Returning to our example, the accounting team reverses the $55,325 accrual on January 1, 2027.

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Reversing journal entry: January 1, 2027

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The reversal creates temporary credit balances in January's expense accounts. Those amounts are offset when the full payroll is recorded.

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Now assume the company processes its $70,000 biweekly payroll on January 8. Using the same illustrative FICA and 401(k) rates, the full payroll cost would be:

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The company records the full payroll expense through its usual payroll process, with the corresponding credits allocated to cash and the appropriate payroll liability accounts. Gross wages are not necessarily the amount deposited into employees' bank accounts because payroll processing also includes employee tax withholdings and other deductions.

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But remember, $55,325 of this expense was already recognized in December. The January reversal offsets that amount, leaving only the portion earned in January.

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As a result, January recognizes $22,130 in payroll expenses, while December retains the $55,325 associated with work performed before year-end.

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The two periods together account for the entire $77,455 cost without duplicating expenses.

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Reversing entries aren't mandatory. A company can also clear the accrued liabilities directly when processing payroll and recognize only the January portion as a new expense.

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Both approaches work when recorded correctly. Reversals are often convenient because they allow the finance team to use its regular payroll posting process without manually splitting every expense between reporting periods.

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Any differences between estimated and actual payroll costs should still be investigated and corrected with a general ledger adjustment.

How year-end payroll taxes affect accrued payroll

Year-end payroll accruals require extra attention because the period when employees earn their wages isn't always the same as the year in which those wages are paid.

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For financial reporting, wages belong in the period employees perform the work. U.S. payroll taxes, however, are generally determined by when those wages are paid.

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Take our earlier example. Employees earn $50,000 in December 2026, but the full biweekly payroll is paid on January 8, 2027. The company records the December wage expense at year-end, while calculating the actual payroll taxes using the rules applicable to wages paid in 2027.

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This matters because several payroll tax wage bases reset at the beginning of each calendar year.

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For 2027, the Social Security Administration's fact sheet puts the Social Security wage base at $192,300, compared with $184,500 in 2026. The employer's Social Security tax rate remains 6.2%, while Medicare remains 1.45% with no wage base limit ^[4].

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Federal and state unemployment taxes also require attention. According to IRS Topic No. 759, FUTA applies to the first $7,000 of wages paid to each employee during the calendar year. The gross rate is 6.0%, which generally falls to 0.6% after a credit of up to 5.4% for state unemployment tax paid; employers in credit-reduction states pay more ^[5]. State unemployment tax rates and wage bases vary by state.

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When preparing the December accrual, accountants should estimate the employer payroll taxes associated with the unpaid wages using the expected payment date and employee-level payroll data. Once payroll is processed, any difference between the estimate and actual amount should be reviewed and adjusted.

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There's also a difference between recording accrued payroll for financial reporting and determining when compensation is deductible for income tax purposes.

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Tax deductions depend on the employer's accounting method, the type of compensation, payment timing, and applicable tax rules. Certain bonuses and other deferred compensation arrangements are subject to additional requirements.

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Keeping these differences in mind helps ensure the year-end financial statements reflect earned compensation without incorrectly applying payroll tax rules from the previous calendar year.

Common accrued payroll accounting mistakes

According to a 2026 EY analysis commissioned by payroll software provider Paycom, U.S. companies spend an estimated $339 on average to correct each payroll error ^[6]. The figure is an inflation-adjusted update of EY's 2022 survey of more than 500 payroll supervisors, managers and more senior staff at U.S. companies with 250 to 10,000 employees, whose respondents reported errors in 1 of every 5 payrolls.

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While those findings cover payroll processing broadly, they highlight the importance of catching errors early. Accrued payroll requires similar attention, especially at month-end, when incorrect calculations or missed entries can affect financial statements.

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Here are some of the most common mistakes to watch out for:

1. Using the wrong payroll cutoff

Suppose your last completed payroll covers work through December 26, but your reporting date is December 31. If you only record the completed payroll, you'll miss the wages earned between December 27 and December 31.

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To avoid this, calculate the accrual through the actual reporting date using timesheets, payroll schedules, and other relevant records.

2. Recording the same expense twice

This happens when a company records unpaid wages at month-end and then recognizes the full payroll expense in the following month without reversing or clearing the original accrual.

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The result is overstated payroll expenses. Using a consistent reversing-entry process or applying the accrued liability during payroll processing helps prevent this.

3. Applying payroll tax rates without checking employee-level data

Using one payroll tax rate for every employee might seem convenient, but it can produce inaccurate accruals.

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Social Security has an annual wage limit, Medicare does not, and state unemployment taxes vary by location and employer. The year in which wages are paid also matters, particularly when a payroll period crosses December and January.

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For example, an employee who reached the Social Security wage base in 2026 may still have Social Security tax applied to wages paid in January 2027 because the annual limit resets⁴.

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To avoid errors, use employee-level payroll records, verify the expected payment date, and apply the appropriate tax rates and wage bases. Any estimates used at month-end should be reconciled against the actual payroll once it's processed.

4. Forgetting benefits and variable compensation

Wages are often the largest part of accrued payroll, so it's easy to overlook smaller obligations. But earned bonuses, commissions, employer retirement contributions, and qualifying unused PTO can also affect the financial statements.

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Review these amounts separately instead of assuming the regular payroll register captures every outstanding compensation obligation.

5. Failing to reconcile payroll liabilities

An accrual may look correct when it's posted but still leave a difference after payroll is processed.

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For example, estimated wages could differ from actual hours worked, or a benefit contribution might change before payment. Compare the accrued amounts with your payroll reports and investigate the differences as part of balance sheet reconciliation.

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A documented month-end close process can help make these checks consistent so unresolved payroll balances don't carry forward unnoticed.

Simplify payroll accrual accounting with DualEntry

Calculating payroll accruals is only one part of the work. Finance teams also need to record the entries, manage reversals, reconcile balances, and make sure the supporting documentation is available when someone else needs to review it.

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As payroll grows more complex, managing these steps manually can add unnecessary work to the close.

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DualEntry's accrual accounting software and close management software help finance teams manage recurring accounting entries and organize their close workflows.

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With a more structured process, your team can:

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• Post a payroll accrual with a reversal date, and DualEntry creates the paired reversing entry in the next period at the same time.
• Save a recurring payroll accrual as an accrual template, then set each period's amount when you run it.
• Load a batch of accruals from a payroll export through bulk import instead of keying entries one at a time.
• Attach the payroll register or accrual calculation to the journal entry as support for review and audit.
• Track reconciliations and outstanding close tasks on a close checklist.

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The goal is to make payroll accruals easier to manage from one period to the next, while giving finance teams better visibility into the numbers they're responsible for.

Accrued payroll FAQs