How to account for tax withholding

pentapepentape Member Posts: 4

I'm hoping someone can help me in determining how to account for tax withholding. Are Federal, state, and payroll taxes in the US accounted for as a liability? If yes, how do I show that the liability has been paid? Thank you for any help!

Comments

  • MikegMikeg Member Posts: 479 ✭✭✭

    @pentape,
    Yes, but it will depend on how payroll is recorded. There are varying methods to record payroll so having a changing payroll tax payable liability is based upon how payroll is recorded. How do you record payroll? Do you expense the net checks as salary?

  • pentapepentape Member Posts: 4

    The net of the paycheck is expensed as salary. The taxes are withheld and paid to the various taxing bodies by my accountant with a monthly statement to me that I manually enter. I've been doing them as a liability, but when does that get recorded as a satisfied liability.

  • MikegMikeg Member Posts: 479 ✭✭✭

    @pentape,
    There are a couple of methods to account for payroll. One way to to do a journal entry to gross up payroll. The entry is as follows:
    Debit Salaries and Wages (gross pay)
    Debit Employer Tax Expense (employers FICA)
    Credit Federal Taxes Payable (Employee FICA, Employer FICA, Federal Employee Withheld)
    Credit State Taxes Payable (State taxes withheld)
    Credit Salaries and Wages (Net pay)
    Payments made should be categorized to the liabilities.

    A second way is to expense the taxes you pay as Salaries and Wages. The business gets a deduction for Gross Wages. Hence, the gross up entry above. By categorizing the Net amounts you are missing the taxes withheld to get you to gross. At the end of the year you will need to make some adjustments to get the expense and liability accounts correct.

    Hope that makes sense to you. If you have an accountant he/she should be able to assist. In case you are not happy with them, I offer accounting, tax and full service payroll at affordable rates.

  • pentapepentape Member Posts: 4

    Thank you, Mike. I'm understanding this to a degree. I'm confused about the Employer share of FICA, though. Do I debit that to a liability or an expense?

  • MikegMikeg Member Posts: 479 ✭✭✭

    @pentape,
    Employers FICA is an expense. It might be easier to see it as an example.
    Facts: Payroll for the month of Oct was 10,000 gross. No one has gone over the FICA cap. Fica withheld 765 Fed withheld 1500 state withholding 750. So net to employees would be 10000-765-1500-750=6985. That would be in salary expense. You make a payment on the 15th of Nov to Fed of 3030 and to the state 750. To keep it simple, assume no account balances except there is 6985 in salary expense. First method
    Debit salary expense 10000
    Debit FICA 765 (employer match)
    Credit Fed taxes payable 3030 (=765+765+1500)
    Credit State taxes payable 750
    Credit salary expense 6985
    Account balances as of 10/31 would be:
    Liabilities
    Fed tax payable 3030
    State tax payable 750
    (These will be paid on 11/15)
    Income statement
    Salary expense 10000 (=6985+10000-6985 original category+debit above-credit)
    Employer Payroll taxes 765
    Now let's look at it with method 2
    Your expense would be 6985 as of 10/31. When you make the tax payments on 11/15, your salary expense would now be 10,765 (6985+3030+750). Tax payments categorized to salary expense. You would then need to move the employer fica expense, remember your fed payment included withholding and fica. Gross wages were 10000. So fica would be 765. (10,000x7.65%).
    Debit Employer payroll tax expense 765
    credit Salaries 765
    account balances 11/15
    Liabilities
    Fed payable 0
    State payable 0
    Income Statement
    Salary Expense 10000 (10765-765)
    Employer Taxes 765

  • pentapepentape Member Posts: 4

    I think I've got it! Thank you very much for your help.

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