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Payroll Accounting

See also:
Commission Accounting
PEO Arrangement Compared to Outsourcing Payroll
Direct Labor
Pension Plans
Federal Unemployment Tax Act (FUTA)
Outsourced Accounting Services

Payroll Accounting

Payroll Accounting is the function of calculating and distributing wages, salaries, and withholdings to employees and certain agencies. It is generally done through different documents such as time sheets, paychecks, and a payroll ledger. Payroll Accounting also involves the process of issuing reports to upper management, so that they are able to make informed decisions about the company’s labor-cost data.

Payroll Accounts

Below are some payroll basic accounts that are used in association with accounting payroll entries as well as a description of each one and the relevance towards payroll.


Cash is the petty cash account which is used to empty the accrued payroll account when the payroll is distributed to the company’s employees.


Accrued Payroll represents a liability calculated by taking the gross pay and subtracting all deductions, or the amount that is due to the employees.

Federal Income Taxes Withheld

This account serves as a deduction from the gross pay or payroll account. It is an accumulation of payroll taxes as a percentage amount which is due to the U.S. Government. Payroll tax rates differ from business to business.

Federal Insurance Contributions Act (FICA) Taxes Payable

The FICA Taxes Payable represents a liability that is due to the U.S. Government. It is then used to fund institutions like Medicare and the Social Security Administration.

Insurance Withheld

Insurance withheld is another deduction from the gross pay and represents a contribution to the employee’s insurance provided by the employer.

Note: Other voluntary payroll deductions and withholdings can be present like bond or stock withholdings that a company would use for investments on the employee’s behalf. Other deductions include union dues or pension funds that the company may hold for its employees.


The payroll account is the gross pay that is calculated by a payroll accountant (i.e. the salary payment or the hourly rate times the number of hours worked).

Payroll Accounting Journal Entries

This is a typical accounting payroll example of journal entries when a company is calculating and distributing the payroll.

Account                           Dr.               Cr.

Payroll                           xxxx

Federal Income Taxes Withheld                       xxxx

FICA Taxes Payable                                  xxxx

Union Dues Withheld                                 xxxx

Bond Withholdings                                   xxxx

Accrued Payroll                                     xxxx
Accrued Payroll                   xxxx
Cash                                                xxxx

Payroll Accountant Duties

Oftentimes, companies outsource their payroll accounting to specialized firms. These firms can perform the same function for a much lower cost than if the company generated them in-house.

Click here to download: The Guide to Outsourcing Your Bookkeeping & Accounting for SMBs

There are six major job functions that the payroll department or specialized company must perform throughout the year, including the following:

1)  Compute gross pay (hourly or salary)

2)  Compute the total amount of deductions (FICA, taxes, etc.)

3)  Calculate the total amount due to employees i.e. the gross pay minus the amount of deductions.

4)  Authorize the amount of payments due to employees.

5)  Distribute the payroll once authorized.

6)  Issue reports to upper management concerning labor-cost data.

Accounting Payroll System

In the past, accounting payroll systems consisted of two journals. The first is the payroll journal. Then, the second is the payroll disbursements journal. Companies used the payroll journal to accrue for salaries and wages towards employees as well as government obligations withheld from the employee’s paycheck. Thus, companies used disbursements journal to pay off these accumulated accruals when they became due.

But thanks to computer systems like Peachtree and Quickbooks, they have combined both of these journals into a payroll ledger. Furthermore, you can outsource these payroll functions at a lower cost and efficiency for a company.

Guide to Outsourcing Your Business's Bookkeeping and Accounting

Payroll Accounting

Originally posted by Jim Wilkinson on July 24, 2013. 

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Wage Rate

See Also:
How to compensate sales staff
Compensation Plan
Equity Interest
Capital Project
Damage Claim

Wage Rate Definition

The wage rate definition is the rate of compensation for a worker. It is one of the central themes of the study of human resources. It is determined by 2 factors: productivity at work or number of production hours.

This study is known as wage rate economics. It is an important factor to economics because the wages of the average worker form an important factor in both microeconomics and macroeconomics. That is, it effects both buyer behavior and governmental policy.

Wage Rate Explanation

Wage rate, explained as the compensation plan for any employee or set of employees, establishes the cost as well as income of human resources. Explained simply, wage rates are based on the amount produced or the number of hours worked. Sales staff, for example, are given a commission based on the number of sales they make. Conversely, hourly employees are paid a certain amount for each hour they spend at work.

Additional compensation methods exist for employees. Health benefits, medical benefits, bonus’, promotions, and even cafeteria plans amount with the above wages to result in the total wage rate for staff. Fringe benefits, like a company car or free products, are not technically considered part of the wage rate which a worker takes.

Many nations require a minimum amount of income per worker. For wage rate, us government calls this the “minimum wage”. the law requires businesses to pay employees at least this much money in order to continue operations.

Wage Rate Example

Let’s look at the following wage rate example. Hank is a worker at a major oil company. Hank, a father of 5, works to support his family. He must make a certain amount of income every day to make sure that he can provide for the necessities which his family needs.

Derek, on the other hand, works for the same oil company. As a young and successful man, Derek is looking to optimize his benefit. Derek is looking for a compensation plan that grows with his productivity. As a result, Derek is willing to risk something if the gain for success is higher.

Both men are sales staff of the same oil company. Luckily, the company has a “choose-your-own” wage rate determination. They can offer this because of the years of study of their employees and work habits. While one is paid an hourly wage, the other is paid mostly through commissions. This allows each to have the work environment that they want. It proves to be a successful plan: both men achieve the same level of productivity. If meeting with a manager, both men will say that they enjoy their work. It is because of the flexible wage rate decision that each can create the plan that best suits their lifestyle.

In order to determine which candidates are the right fit for your company, download and access your free white paper, 5 Guiding Principles For Recruiting a Star-Quality Team.


wage rate, Wage Rate Example, Wage Rate Definition

wage rate, Wage Rate Example, Wage Rate Definition

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Social Security Rate

Social Security Rate Definition

The social security rate definition is a tax taken out of employees and employers salaries and wages. This tax goes towards the social security program in the United States. The founders built this program to provide benefits to eligible retired persons.

Social Security Tax Rate Meaning

The current social security tax rate withheld from each paycheck is in the amount of 6.2%, and is equally contributed for by the employer making the total 12.4%. For example, the social security tax cap 2010 is equal to $106,800. This means that once an employee has made earnings of this amount there can be no further tax taken out for that employee’s paychecks. Furthermore, these calculations are normally not performed by the employee. Instead, the payroll department or an outsourced function calculates the social security rate.

Social Security Tax Rate Example

For example, Bob works for Testacorp Inc. his annual salary is $200,000 which he receives in a paycheck every two weeks for $8,333. Therefore, Social Security requires Bob to pay a social security tax. The amount for his first 13 paychecks equals $516. After these paychecks, Bob’s cumulative earnings are above the threshold of $106,800.

If you want to overcome obstacles and prepare to react to external factor, then download the free External Analysis whitepaper.

social security rate, Social Security Tax Rate

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social security rate, Social Security Tax Rate

See Also:
Payroll Accounting
Deferred Income Tax
Tax Brackets
Flat Tax Rates
How to Maintain an effective Job Schedule

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Remuneration Definition

See Also:
Pension Plans
Cafeteria Plan
How to compensate sales staff
Passive Income
Electronic Funds Transfer (EFT)

Remuneration Definition

We can define remunerations as compensation for employment services. Remuneration can include hourly wages, fringe benefits, salary compensations, and other forms of compensation such as stock options and cash bonuses. Strategies differ across industries and companies.

Remuneration Strategy

A company’s remuneration strategy, or compensation strategy, serves as the basis for planning and addressing compensation issues throughout the organization. Compensation strategies vary across industries and even within companies, depending on the nature of the work and the level of the employee in the hierarchy. Remuneration strategies should include both long-term and short-term incentives, and should include both monetary and non-monetary compensation.

For instance, a remuneration strategy should entail a mixture of long-term and short-term incentives, and a mixture of monetary and non-monetary compensation. Lower level employees should receive more short-term monetary incentives, and to a lesser degree long-term non-monetary compensation. Whereas senior employees should receive a greater proportion of long-term non-monetary compensation, and to a lesser degree short-term monetary compensation.

Basic Remuneration

The most basic type of remuneration is periodic compensation. Under this type of pay plan, compensate workers for spending time at work. Pay rates can differ due to skill, seniority, or education level. With this type of remuneration, there is no direct connection between performance and compensation. Motivate the workers with the prospects of being promoted to a higher pay rate, and avoid demotion and dismissal.

Performance Based Incentives

In certain work environments, it is more appropriate to evaluate and compensate employees based on performance and results. Examples of performance based incentives include merit pay, contingent pay, and piece rate pay.

Merit pay is an incremental pay increase achieved after reaching a certain performance level. For example, merit pay is a pay raise. Contingent pay refers to pay received after achieving a specific objective. Contingent pay may complement a base-salary or wage. An example of contingent pay is a bonus received for hitting a certain sales target. Piece rate pay refers to a flat rate earned for completion of individual units of production or work. For example, a seamstress in a shoe factory might earn a certain monetary amount per shoe. That is piece rate pay.

Another form of incentive based on performance is commission. Employees working on commission earn income based on sales of company products. For a more detailed look at issues regarding commission, see the section below entitled Sales Commission Structures.

Profit Sharing Policy

A profit sharing policy at a company encourages the employees to consider the overall goals and performance of the organization. Profit sharing may be earned as cash, shares of company stock, stock options, or stock appreciation rights. It may be earned in the current period or it may be deferred to a later period. Allocate profit shares among employees based on seniority or other criteria. The idea is to incentivize employees to strive towards success and performance not only at their own individual level but for the company as a whole.

Non-Financial Remuneration

Employees also benefit from and appreciate non-financial forms of compensation. Examples of non-financial remuneration include awards for recognition, a pleasant work environment, opportunities for advancement, employee buy-in in decision-making processes, perks, and fringe benefits.

Sales Commission Structures

Offer employees performance based incentives as part of their compensation. For example, many salespeople work on commission. These sales people earn a certain percentage of each sale and therefore motivates them to sell more. But there are some issues to consider when establish the sales commission structure of employee compensation.

Many companies offer salespeople commission as a percentage of the selling price of the product being sold. This essentially motivates the salesperson to focus on selling the most expensive products so as to earn the highest amount of commission. However, this may not always be the best thing for the company as a whole since the most expensive products may not be the most profitable items.

One way to effectively incentivize sales employees in a way that maximizes the company’s profitability is to pay commission based on a percentage of the product’s contribution margin. Define contribution margin as selling price minus variable production cost. A product with a higher contribution margin is more profitable than a product with a lower contribution margin. Incentivizing sales employees to sell the products with the highest contribution margins – regardless of the selling price – can align the goals of the salespeople with the overall goals of the company.

Download and access your free white paper, 5 Guiding Principles For Recruiting a Star-Quality Team to determine which candidates are the right fit for your company.

Remuneration Definition, remuneration strategy

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Remuneration Definition, remuneration strategy


Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

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Direct Labor

See Also:
Direct Cost vs Indirect Cost
Cost Driver
Direct Materials
Direct Labor Variance Formulas
Absorption Cost Accounting
Direct Material Variance Formulas

Direct Labor Definition

In accounting, direct labor (DL) costs are the costs associated with paying workers to make a product or provide a service. The workers must be clearly involved in producing the product or providing the service. Direct labor costs are one of the costs associated with producing a product or providing a service. Furthermore, direct labor costs are in contrast to indirect labor costs. Indirect labor costs are costs associated with workers who are necessary, but they are not directly involved with making the product or providing the service.

Examples of direct labor costs include the following:

  • In a manufacturing setting, wages paid to workers in an assembly line
  • In a service setting, wages paid to workers in the kitchen of a restaurant

Direct Labor and Overhead Allocation

Sometimes it may be appropriate to use direct labor as a cost driver to allocate indirect costs to a production process.

Overhead Allocation

Indirect costs, such as overhead costs, are not directly traceable to the final product; however they are necessary for the production of the process. As a result, they must be incorporated in the overall cost of the product. In addition, allocate indirect costs to the final product by way of a cost driver.

Direct Labor

In production, processes in which direct labor is an appropriate cost driver, allocate indirect costs to the cost of units of output via DL hours. Then, allocate indirect costs to the units of output using a cost driver rate. For example, it could be $2 dollars per hour of direct labor, or $0.40 per hour of direct labor, depending on the specifics of the production process.

Direct labor is a typical cost driver for allocating indirect costs to units of output from a production process. But as production processes have become more automated over time, using DL is no longer as common as it once was. As a result, other cost drivers are frequently used to allocate indirect costs in a production process or in providing services to customers.

If you want to check if your unit economics are sound, then download your free guide here.

direct labor

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direct labor


Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.


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Direct Tax Definition

See Also:
Indirect Labor
Direct Labor
Direct Cost vs. Indirect Cost
Unsecured Credit
Flat Tax Rates
Tax Abatement

Direct Tax Definition

Direct tax, defined as a tax directly on the amount of a taxable item, is the current tax method of the U.S.A. Currently in the U.S., this includes taxes wages, property, capital gains, or directly to the amount of some other valuable item. In some situations, direct tax credits are also given to those who need or would benefit from decreased tax income.

Direct Tax Explanation

Direct tax, explained as a tax on valuables, differs greatly from indirect tax. Where indirect tax taxes a factor which does not directly increase the wealth of the individual, like consumption, direct tax places a tax on the factors that increase wealth in a person’s life. This is the difference of direct tax vs indirect tax.

Direct Tax Advantages

Direct tax advantages are numerous. With a direct tax, the government closely knows the amount to be taxed and the amount applied. Direct tax cuts out a liaison, preventing corruption of lower level tax officials. Additionally, many argue that direct tax apportionment creates a civic sense; that people think in terms of the community rather than themselves.

Direct Tax Disadvantages

Direct tax disadvantages also exist. Under direct taxation, people are taxed based on their assumed ability to pay taxes. This means that the certain members of the population receive a disproportionately larger amount of taxation that others. Additionally, direct tax allows the tax rate of individuals to be decided by government rather than their actions. These two factors relate to the common opinion that direct tax can be demotivational. With an indirect tax, like a flat consumption tax, people are taxed based on their amount of consumption. With a direct tax, people are taxed based on the amount of wealth they build. Some argue that this causes the benefits of productivity to be decreased, thus providing a disincentive to produce as much as possible.

Direct Tax Example

For example, Nancy is a financial adviser. She helps others make investments which improve their wealth. Thus, Nancy believes she is helping others to live the best life they can.

Nancy deals with direct tax code often. First, her personal wages fall under direct taxation. Next, the property her clients invest in experiences a direct tax in the form of property tax. Additionally, the financial instruments, which hold the wealth of her clients, fall under direct taxation. When they receive capital gains, they pay a certain portion to the government as tax.

Nancy sometimes questions the government for the method of direct taxation. Despite this, she knows that direct taxation is here to stay. She also knows that the government engages in projects which are important to the people. Though she does not agree with all of the tax laws, she accepts it as a part of her life and still seeks to be the best financial adviser she can.

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