Accounting for employee benefits
Northwind's October plan as five journal entries: the carrier's bill, the employees' pre-tax share, the employer's expense, a prepaid premium and the payable that ties them.
Benefits add three accounts to Northwind's chart: 1450 Prepaid benefits, 2150 Benefits payable and 6150 Employee benefits expense. The whole of October's plan is five entries, and only one of them is Northwind's own cost.
BEN-1 · The carrier's October bill is paid: $1,300 for 2 enrollees.
| Account | Debit | Credit |
|---|---|---|
| 2150Benefits payable | 1,300.00 | |
| 1000Cash — operating | 1,300.00 | |
| Balanced | 1,300.00 | 1,300.00 |
The carrier bills in advance, so October's cover is paid on the first. The debit is to the payable the month's deductions and accrual will fill.
On the 25th, payroll takes the employees' $325 out of their pay. It is part of their gross pay — already in payroll expense — so it is not a second cost; it is a slice of the wage credited to the payable instead of to cash.
BEN-2 · October payroll: $8,400 gross, with the employees' $325 share of the premium taken out pre-tax.
| Account | Debit | Credit |
|---|---|---|
| 6000Payroll expense | 8,400.00 | |
| 2150Benefits payable | 325.00 | |
| 2100Payroll liabilities | 1,609.75 | |
| 1000Cash — operating | 6,465.25 | |
| Balanced | 8,400.00 | 8,400.00 |
October's payroll, the payroll track's register run on wages after the premium. $1,609.75 withheld, $6,465.25 paid.
At month end Northwind records its own 75%: $975 of employee benefits expense. That is the month's cost of the plan to the company, and it belongs to October because October's cover was used.
BEN-4 · Northwind's own 75% share of October's premiums: $975.
| Account | Debit | Credit |
|---|---|---|
| 6150Employee benefits expense | 975.00 | |
| 2150Benefits payable | 975.00 | |
| Balanced | 975.00 | 975.00 |
Benefits payable now nets to $0: the $1,300 paid on October 1 is matched by the employees' $325 and Northwind's $975. A balance left over at month end is a missed deduction, a missed accrual or a bill paid twice — reconcile it to the carrier's invoice every month.
On October 28 the November bill is paid early. On October 31 none of November's cover has been used, so the $1,300 is an asset — a prepaid expense — not October's cost.
BEN-3 · November's bill is paid early: $1,300 for cover that starts on November 1.
| Account | Debit | Credit |
|---|---|---|
| 1450Prepaid benefits | 1,300.00 | |
| 1000Cash — operating | 1,300.00 | |
| Balanced | 1,300.00 | 1,300.00 |
BEN-5 · November's cover begins, so the prepaid bill becomes November's payment.
| Account | Debit | Credit |
|---|---|---|
| 2150Benefits payable | 1,300.00 | |
| 1450Prepaid benefits | 1,300.00 | |
| Balanced | 1,300.00 | 1,300.00 |
On November 1 the cover begins: the prepaid becomes November's payment to the carrier.
Wrong
October: 6150 Employee benefits 2,600 — both bills paid in October, both shares
Right
October: 6150 Employee benefits 975 October 31: 1450 Prepaid benefits 1,300
The cost of a benefit follows the month of cover, not the day the bill is paid. And only the employer's share is benefits expense.
Pay the bill to the payable, take the employees' share from their gross, and expense only the employer's share, in the month of cover.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- Tax — not GAAP
- IRS Publication 15 (2026), Circular E — Introduction (opens in a new tab)Withheld payroll taxes are the government's money, held in trustFree to read
- US GAAP
- ASC 340-10 (opens in a new tab)Other Assets and Deferred Costs — prepaid expensesFree after registration
- ASC 405 (opens in a new tab)LiabilitiesFree after registration
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Employee benefits expenseThe employer's own share of health premiums, HSA and retirement contributions and other benefit costs, recognized in the period the cover or the service relates to. The employee's share is not in it: that was part of gross wages
- Benefits payableWhat the employer owes a carrier or a plan: the employees' premiums and deferrals withheld from pay, plus its own share, until paid over. It should clear to zero at each month end, or be explained by a payment in transitConvention
- Prepaid expenseCash paid before the benefit is consumed — an asset until it is. "Prepayment" is the UK and IFRS word for the same asset; a customer paying us early is a customer advance or deposit, a liability
- Payroll liabilitiesWhat an employer owes on wages it has already paid — the income tax and the employees' share of Social Security and Medicare withheld from their pay, plus the employer's own payroll taxes — until it is deposited with the government. The withheld part was never the employer's money: IRS Pub. 15 calls it trust fund taxesConvention
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Journal entry balancerPaste an entry, see what it's out by, and copy the lines back out.
- Prepaid & deferred releaseRelease a prepaid or deferred balance evenly or by days in each month.
- Journal entry for payrollOn payday, debit Wages and salaries for gross pay, credit Cash for net pay and credit liabilities for everything withheld. Book the employer's own taxes separately (debit Payroll tax expense, credit Payroll taxes payable), and clear both payables when they are remitted.
- Journal entry for prepaid insuranceWhen the premium is paid, debit Prepaid insurance and credit Cash. At each month-end, debit Insurance expense and credit Prepaid insurance for the month's share of the policy, until the prepaid balance reaches zero.
- Journal entry for accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.
- Prepaid expense vs accrued expenseA prepaid expense is an asset: the cash went out before the cost was used. An accrued expense is its mirror, a liability for a cost already used but not yet paid or billed.
- Accrued expenses vs accounts payableBoth are liabilities for costs already incurred. If the vendor's invoice has arrived and been approved, the cost is in accounts payable. If it hasn't, the month-end estimate is an accrued expense.
- Payroll journal entries, from gross to netGross wages, employer taxes, withholding and net pay as journal entries: what each payroll run books, how to accrue it at month end, and where benefits go.
- Chart of accounts for startups: a starting templateA starting chart of accounts for a US startup: number ranges, the expense accounts you need, and when to add an account versus a class or tracking tag.
- Accrued expensesCosts you've incurred by month end but haven't been billed for yet, like legal work, usage-based software or payroll that spans the month end.