My business hires independent contractors who are paid monthly for their earnings in the previous month (i.e. earnings from August 1-15 will be paid out on September 1st). However, I deduct a $5 fee from their wages for payroll processing.

So how would I journalize this $5 deduction? Would it be considered revenue or something else?

Example: Employees get 70% commission of sales. Employee B sells $100 and is to be paid $70 next pay period. In the next pay period I have to deduct the $5 payroll fee from Employee B's earnings.

Is this in their contract, a "payroll fee" I would worry on the legality of this.

Yes. If I have to do a bank wire to an non-US contractor, I let him / her know that they are responsible for the fee related

You're not making sense.

At first, you're charging a $5 payroll processing fee as a deduction from salary. So that suggests recovering an admin overhead.

Then you say it's if you have to wire money then you charge this fee. So that suggests recovering a fee outside of normal payroll processing costs.

I can help you do the journal, but I need to know which of the situations it is that apply first.

All the 1099 independent contractors I hire are paid by having money wired to them through ACH. So the $5 payroll processing fee is a deduction from salary because they are being wired the money.

So this is an expense over and above normal admin cost of payroll processing. This means that it is not part of your ordinary activities, so you can't class it as revenue or take it through the profit and loss.

So take it straight to the balance sheet.

Using your original example, you need to:

In current period:

Dr wages account (P&L) $70 (you have to show the full amount due to the contractor)
Cr Bank charges (balance sheet - current liabilities) $5
Cr Payroll Control (balance sheet - current liabilities) $65

In the next period when the payment is made:

Dr Bank Charges (balance sheet - current liabilities) $5
Dr Payroll Control (balance sheet - current liabilities) $65
Cr Bank $5 to pay the wiring fee
Cr Bank $65 net pay to the contractor

The overall effect is that in the first period, the full $70 pay due is recorded in the P&L in the period it relates to, and a current liability is created in the balance sheet for the amount due for the fee and net pay to the contractor.

Then in the second period, $70 is paid out of the bank, $65 to the contractor, and $5 to the bank charges liability, and the liability in payroll control and bank charge accounts are cleared off, returning them to zero.

If you think it should be part of normal payroll processing costs then the treatment is slightly different, but I can show you how to journal that too.