What is Payroll Accrual? 

For most businesses, effective monitoring and maintenance of employee payroll accrual is an essential element of Human Resource accounting. But what does payroll accrual even mean? And do all businesses have employees that incur payroll accruals? 

Lucky for you, this step by step guide lays out everything you need to know about the concept of payroll accrual, including how it applies to businesses and the best way to handle it. 

The Meaning of Payroll Accrual 

First, let’s break down the term itself. The first word, payroll, refers to compensation paid out to employees within a certain timespan, such as two weeks or a month. The second word, accrual, indicates accumulation over time. 

Together, payroll accrual refers to employee wages and compensation that has not yet been paid, and is thus accumulating. For instance, let’s say a business pays its employees every two weeks and that an employee, Jane, gets paid $20 an hour and has worked 53 hours over the first 10 days of the current two-week pay period. 

This would mean that Jane’s accrued payroll for wages currently stands at $1060. If you add up the current unpaid compensation for each of the employees, you will have the company’s total payroll accrual. 

However, as we’ll discuss in this article, wages are not the only contributing factor to payroll accrual.

 

The Value of Payroll Accrual 

Monitoring payroll accrual keeps an employer informed about how much compensation they’re liable for at any point in time. This is particularly helpful information for businesses that employ both hourly and salaried workers, as well as for a young and fast-growing company that’s quickly adding new staffers who often work a lot of hours.  

In addition, accrued payroll can get complicated when a company is handing out bonuses and commissions and various forms of benefit payments, so it’s important to keep a running tally.  The resulting benefit is three-fold: employees are paid what they’re owed, employers know their accrued liability and likely payroll tax, and the business has a deeper understanding of its budget and balance sheet, enabling better planning. 

What Are the Different Types of Payroll Accrual? 

Payroll accruals cover a wide variety of employers’ financial obligations to their staff. Essentially, the employer accepts liability for all forms of owed compensation until it’s been paid.  

Wages 

As in the example of Jane provided above, hourly wages represent the most common form of payroll accrual. Recording and tracking employee hours is, therefore, crucial, and the best way to ensure accurate compensation for each pay period. 

If a business has only salaried employees, you may not have any payroll accrual, because that compensation does not officially accrue until the end of the pay period. The exception is when salaried employees are awarded bonuses or other extra payments within a given period. 

Commissions and Overtime

Employees involved in sales might be given a commission for each sale in addition to their regular wages. In such cases, it’s vital to carefully track earned commissions and the total of each one. 

Similarly, keeping track of employees’ overtime work and increased wages is essential. 

Bonuses and Incentives

Just like with commissions and overtime, it’s important to record and monitor all bonuses and incentives that employees earn.  

Paid Time Off

It’s essential to keep accurate records of employees’ paid time off, especially if they are paid hourly. Businesses will often carry an employee’s accrued paid time off from one pay period to the next, even while prohibiting paid time off from accruing from one calendar year into another. 

Most hourly employees earn paid time off at a predetermined rate that’s based on the number of hours worked, or per pay period. For instance, one business might give its employees one hour of paid time off for every 45 hours worked, while another could provide employees with two hours of paid time off at the close of each pay period. 

Salaried employees, meanwhile, are typically provided with a predetermined amount of paid time off. Regardless of the business’s paid time off policy, HR is responsible for the recordkeeping and monitoring of its employees’ accrued time. 

Benefits 

This type of payroll accrual covers a wide range, especially since every business offers its workers different benefits. One business, for example, might offer dental and life insurance to manager-level staff, while lower employees receive only health insurance. 

As a result, tracking the benefits portion of payroll accrual can be complicated, so it’s important to get a handle on the company’s liabilities and keep reliable and up-to-date records. 

Taxes

A key element of payroll is, of course paying taxes on the compensation paid out by the business. These tax payments must also be incorporated into payroll accrual. Below, we’ve identified some taxes to monitor:

• Federal taxes
• State income taxes
• State unemployment taxes
• Medicare contribution
• Social Security taxes
• Employee pensions and retirements
• Employer payroll taxes

Think of it this way: payroll accrual includes all compensation provided to an employee or on an employee’s behalf in exchange for the work they provide the business – before the employee or relevant government body receives payment.

Who Should Use Payroll Accrual?

Unless a business is exceptionally small, with just a handful of employees, you’ll want to keep a close watch on payroll accrual so you’ll always know how much compensation the business is liable for at any moment. 

Furthermore, if a business sells merchandise, IRS requirements and regulations specify that the accrual method must be used to track inventory and perform the relevant accounting. 

What is Accrual Accounting? 

Accrual accounting is one of the generally accepted accounting practices (GAAP). Businesses that implement the accrual accounting method actively record transactions as they occur, regardless of when capital is exchanged. 

This method requires HR to promptly update the company books as needed, accurately detailing what each employee is due before they are compensated on payday.

Accrual accounting provides a current, accurate understanding of the business’s finances. 

Is There an Alternative to Payroll Accrual Accounting?

The IRS allows most businesses that are not corporations to select their payroll accounting method. Of the two GAAP methods, one is accrual accounting, and the other is the cash accounting method.  

Businesses that apply the cash accounting method do not record transactions in their books until the actual exchange of funds. In cash accounting, therefore, there’s no employee payroll accrual to monitor because the compensation owed to employees is not accumulating. 

As for the business itself, the cash accounting method just doesn’t provide as accurate and current of the company’s financial status as the accrual method does.

How Do I Calculate Payroll Accrual? 

Determining every employee’s payroll accrual without the help of professional software tends to be a long, tedious process. Each employee’s accrual is likely to be different from that of their colleagues, and could potentially change from pay period to pay period. 

The process can get messy quickly if you don’t pay close attention. To save yourself some time and possible headaches, we recommend a payroll software service like Gusto or Justworks.

But if you’re feeling confident about juggling all those numbers, you can utilize this formula: 

(Hourly rate * total hours)
+   overtime
+   commissions
+   bonuses
+   incentives
+   paid-time-off
+   benefit wages
+   relevant accumulated taxes
______________________________
[ total payroll accrual ]

Once staff has been paid, payroll accrual will be resolved and return to zero. 

Conclusion

Now you understand why most businesses closely track payroll accrual and rely on accrual accounting methods as part of their HR. Payroll accrual can be a crucial part of entrepreneurial success, as it’s likely to boost employee morale and a business’s financial health. 

To avoid mistakes and time-consuming calculations, we recommend relying on a reliable payroll tool. But if you decide to shoulder the burden yourself, be sure to check and re-check your accrual totals, as errors will be a constant risk.