Payroll Liabilities and Accrued PTO: Year-End Testing Procedures With Calculations

Payroll expense is easy to test in total. The liabilities behind it are where misstatements hide: wages earned but unpaid at year end, bonuses accrued on a formula, paid time off that employees carry forward, and withholdings that sit in a clearing account. This post sets out the tests and the calculations. Pair it with the payroll audit program and unrecorded liabilities search.

Accrued wages: the cutoff calculation

The assertion is completeness and cutoff. Wages earned through the year-end date but paid in the next period must be accrued.

Step 1. Find the last pay date before year end and the first pay date after. Identify the pay period each covers.

Step 2. Determine the days earned but unpaid at year end.

Step 3. Recompute the accrual from the next payroll register.

Illustrative facts: biweekly payroll, pay period ends Friday January 9, paid January 16. Year end is Wednesday December 31. The January 16 payroll covers December 27 through January 9, which is 14 days. Days in December: December 27 through December 31 is five calendar days, of which three are working days (December 29, 30, 31; the 27th and 28th are a weekend). For a ten-working-day period, 3/10 of the gross wages for the pay period belongs to December.

• Gross wages for the January 16 register: $412,000.
• Accrual: $412,000 x 3/10 = $123,600.
• Add employer taxes on the accrual at the effective rate (6.2 percent Social Security plus 1.45 percent Medicare, 7.65 percent combined, per IRS Publication 15 for 2026; the example ignores the 2026 Social Security wage base of $184,500 and unemployment taxes, which the client's actual rates would change): $123,600 x 7.65% = $9,455.

Compare the recomputed amount to the client's accrual. If the client booked $118,000, the difference is $15,055 and comparison to the clearly trivial threshold decides whether it goes on the summary of uncorrected misstatements.

Salaried employees paid monthly or semi-monthly use the same logic with days in the period.

Accrued bonuses and commissions

Obtain the bonus plan, the board or compensation committee approval and the calculation. Test:

• The plan terms. Read the document and note eligibility, targets and payment timing.
• The performance measure. Recompute the measure from the audited numbers. A bonus tied to net income is circular until the adjustments are known, so use the latest numbers.
• The population of eligible employees against HR records.
• Subsequent payment. Agree payments to the payroll register after year end and to the accrual.
• Discretionary bonuses declared before year end and paid after. If the decision was made before year end, accrue. If made after, it is a subsequent event that is not recorded.

Accrued paid time off: the rollforward recompute

Under ASC 710, PTO that employees earn and carry forward is a liability when the right vests or accumulates and payment is probable and the amount can be estimated. Obtain the client's PTO policy and the accrual schedule by employee.

Tests:

1. Agree hours to the timekeeping or HRIS balance at year end.
2. Agree rates to the payroll register, using the current rate or the rate at which the employee will be paid.
3. Reperform the multiplication and the total.
4. Roll the balance forward: opening hours plus hours earned minus hours used equals closing hours. Agree hours used to timesheets.
5. Test the policy: use-it-or-lose-it forfeitures, caps and payout on termination. Confirm that the accrual reflects the policy and any state law that requires payout.
6. Check completeness: the schedule ties to the full employee population at year end, including part-time employees.

Withholdings and payroll taxes payable

The balance sheet shows withholdings payable for federal income tax, Social Security and Medicare, state and local taxes, garnishments and benefit deductions. Test each:

• Reconcile the account to the payroll register for the last pay period and the amounts due.
• Agree subsequent deposits to EFTPS or state payment confirmations, and the date paid.
• Compare quarterly totals on Form 941 to the ledger activity. The IRS requires employers to keep copies of filed returns and records of tax deposits for at least four years, so the client should have them.
• Look for stale balances. A clearing account with a balance that never goes to zero means deposits and expense are mismatched.
• Test benefit withholdings to the carrier or plan invoices and remittance dates, especially for 401(k) deferrals, which must be deposited timely to the plan.

Subsequent payments as a completeness test

Extend the unrecorded liabilities search to payroll: look at the first payroll registers after year end, quarterly payroll tax payments due in the new year, severance and bonus payments. Any amount that relates to service before year end and is not in the liability needs an explanation.

Worked example summary

A client with about $10.7 million of annual wages (26 biweekly payrolls of roughly $412,000). The auditor finds:

• Accrued wages recorded $118,000 vs recomputed $133,055 (including taxes): understatement $15,055.
• Accrued PTO recorded $214,000 vs recomputed $221,400: understatement $7,400 because three part-time employees were missing from the schedule.
• Accrued bonus agreed to the board-approved plan and paid in February at the recorded amount: no difference.
• Payroll tax liability agreed to the January 15 deposit: no difference.

The two understatements total $22,455. With performance materiality of $180,000, they are passed adjustments, but the auditor records them on the summary of uncorrected misstatements and checks whether the cause (the schedule missed part-time staff) points to a control deficiency. See summary of uncorrected misstatements.

Documentation checklist

• Pay period and cutoff calculation for the accrual.
• Source of each rate, hour and bonus input with tick marks.
• PTO schedule with completeness tie to the HR population.
• Reconciliation of each withholding account and subsequent payments.
• Differences evaluated and carried to the summary.

CORAA prepares ready-to-review audit files for US CPA firms; the firm keeps the client, the review and the signature. See /us.

Sources

• AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained; AU-C Section 450, Evaluation of Misstatements Identified During the Audit
• Internal Revenue Service, Employment Tax Recordkeeping: irs.gov
• Internal Revenue Service, Publication 15, Employer's Tax Guide: irs.gov
• U.S. Government Accountability Office, Financial Audit Manual, Volume 1 (GAO-26-108577), June 2026, section 540 on accumulating misstatements: gao.gov

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error