Guide 05 · Liabilities
Payroll: the gross-to-net proof
Payroll is the largest expense in a practice and the one most often posted as a single summary number nobody checks. One register, three destinations, and a liability rollforward that explains every dollar still sitting on the balance sheet.
The identity that must hold
Every payroll run obeys one arithmetic identity, and if your posting does not reproduce it, something has been summarised away. Gross pay goes to exactly three places: the employee, the taxing authorities, and other deductions. Nothing else.
= Net pay to employees
+ Employee tax withholdings
+ Employee deductions (benefits, retirement, garnishments)
And separately, as employer cost:
Total payroll expense = Gross wages + Employer taxes + Employer benefit contributions
The second line is where errors hide. Employer payroll taxes are an expense of the employer, not a deduction from the employee, and the employer match on retirement is the same. A posting that treats the total cash leaving the bank as "wages expense" collapses those into one number and makes the wage line wrong in both directions — too high by the employer taxes, too low by whatever the employees paid in deductions that were remitted later.
| Line | Dr | Debit | Credit |
|---|---|---|---|
| Wages expense | Expense | 184,300.00 | |
| Employer payroll taxes | Expense | 14,098.95 | |
| Employer retirement match | Expense | 5,529.00 | |
| Cash — net pay | Asset | 131,842.17 | |
| Cash — tax impound | Asset | 58,554.78 | |
| Retirement payable | Liability | 11,058.00 | |
| Benefit deductions payable | Liability | 2,473.00 | |
| Totals | 203,927.95 | 203,927.95 |
Per run, not per month
Reconcile each run when it happens. It takes a few minutes with the register in front of you and it is a genuinely hard job to reconstruct six weeks later from three registers, a quarterly return and a bank statement.
Agree cash to the bank, per debit
Most providers take net pay and the tax impound as separate debits, sometimes on different days. Match each debit individually. A single combined entry that nets to the right total will not tie on either day.
Agree the register to the entry
Gross, each withholding, each deduction, employer taxes, net. Line for line against the provider's register, not against the summary email.
Confirm the expense allocation
By department, location and entity, as the register reports it. If wages are allocated by a percentage somebody set two years ago rather than by the register's own cost centres, your by-location P&L is an estimate and your location margins are fiction.
Check the liability accounts moved as expected
Deductions withheld this run should increase the payable; remittances should decrease it. If a payable is not moving in both directions, either the withholding or the remittance is posting somewhere else.
The liability rollforward
Every payroll liability account gets the same four-line schedule, every month. This is what makes the balance explainable rather than merely present.
+ Amounts withheld or accrued this period
− Amounts remitted this period
= Closing balance — which must equal what is genuinely still owed
The final test is the one that matters: the closing balance has to agree to something external — the next remittance, the provider's liability report, the retirement plan's statement. A closing balance that only agrees to itself is not reconciled.
| Account | Opening | Withheld | Remitted | Closing | Agrees to |
|---|---|---|---|---|---|
| Payroll taxes payable | 0.00 | 117,109.56 | (117,109.56) | 0.00 | Impounded same day |
| Retirement payable | 11,058.00 | 22,116.00 | (22,116.00) | 11,058.00 | Plan statement |
| Benefit deductions payable | 2,473.00 | 4,946.00 | (4,946.00) | 2,473.00 | Carrier invoice |
| Accrued PTO | 88,140.00 | 9,220.00 | (7,615.00) | 89,745.00 | PTO balance report × rates |
What should and should not be left
Should be zero
Tax liabilities where the provider impounds on the run date. If there is a balance in an impounded tax account at month end, either a remittance was not posted or a withholding was posted twice.
Should equal one period
Deductions withheld but remitted monthly — retirement, benefit premiums. The balance should be roughly the amount withheld since the last remittance. Two periods' worth means a remittance is missing.
Should be a calculated figure
Accrued PTO: hours outstanding times current rates, recalculated each month. A PTO accrual that has not moved in a year has not been recalculated, and it is almost certainly understated after any raise cycle.
Should never exist
A "payroll clearing" or "payroll suspense" account with a residual balance. That is the account where the unexplained goes, and once it exists it only grows. Resolve it and close the account.
Any payroll liability balance older than one remittance cycle is wrong until proven otherwise. Sort every payroll liability by how long the balance has been sitting there and start at the top — the oldest item is usually a duplicate or a remittance posted to the wrong account.
The month-end accrual
When a pay period straddles month end, the days worked in the earlier month belong in the earlier month. Accrue them — gross wages for the days worked, plus the employer taxes on those wages, which is the part most often left out.
+ employer taxes on that amount
Reverse it in the following month rather than adjusting it. A reversing accrual is self-correcting and visible; an adjusted one requires somebody to remember what the adjustment was for. In a semi-monthly cycle the accrual is zero in the months where periods align, and that is fine — the schedule should show zero, not be skipped.
Shared payroll across entities
Where one payroll covers staff at several entities from one bank account, the split has to be pushed out as an intercompany transaction on the run date, every run — not reconciled up monthly. A monthly catch-up entry cannot reconcile to weekly or biweekly cash movements, and the intercompany balance will never tie at a month end that falls mid-cycle.
Take the split from the payroll register's own cost centres. The register already knows who works where; a percentage allocation maintained by hand will drift from it within a quarter. See guide 03 for the matrix that proves it.
Why I reconcile this per run. Payroll is the biggest expense line, it is the one with statutory exposure attached, and it is the easiest to get right if you do it while the register is open. Every month of delay makes the same work several times harder.