Net payroll payable definition
/What is Net Payroll Payable?
Net payroll payable is the cash amount of compensation payable to employees as of a reporting date. “Net” is used in the term because this is the residual amount of compensation left after all taxes and voluntary deductions have been removed from the gross amount payable to employees. In some cases, the net amount payable may be greatly reduced from the gross payroll amount, especially when the wages of certain employees are being garnished, perhaps for child support or debt repayments.
Example of Net Payroll Payable
As an example of net payroll payable, a farm has five employees. For the current pay period, the total gross payroll (before deductions) is $10,000. From this amount, the farm withholds the following:
Federal and state income taxes: $1,500
Social Security and Medicare taxes: $765
Employee retirement contributions and health insurance premiums: $735
These deductions total $3,000, so the net payroll payable—the actual cash amount owed to employees—is calculated as follows:
$10,000 (Gross Pay) – $3,000 (Deductions) = $7,000 Net Payroll Payable
This $7,000 is reported as a liability on the farm’s balance sheet if unpaid as of the reporting date.
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FAQs
How does net payroll payable affect the balance sheet?
Net payroll payable increases current liabilities because it represents amounts owed to employees that have not yet been paid. When the payroll is disbursed, the liability is eliminated and cash decreases by the same amount. This flow ensures that the balance sheet properly reflects earned but unpaid compensation at each reporting date.