Whether you have one employee or many – or have an incorporated business that pays you employee wages – understanding how to account for payroll taxes is crucial. Regardless of when payroll taxes are remitted to tax authorities, they are business expenses on the pay date they’re incurred. Even for a business that handles bookkeeping on a cash basis, the expensing is immediate on payday. Payroll taxes are not an expense on the date you pay them.
Some payroll taxes are withheld from employee wages and remitted later. Employee taxes are part of the expense category for wages – despite not comprising net pay to workers. An expense account reports gross wages — before deduction of employee taxes. Taxes withheld from employees are not a “tax” expense of the company. The difference between gross wages and net paychecks is recorded as a liability the employer owes.
Other payroll taxes are not withheld from wages. These are the only amounts for the company’s expense category of employment taxes. These count as expenses on payday and as employer liability. Payment of accrued payroll tax liability is not an expense because the amounts have already been expensed on paydays. Remittance of the accrual merely offsets the credit balance in the liability account.
As an illustration of payroll tax accrual, assume that you have a corporation and must pay yourself officer wages. You determine $30,000 as your annual salary. Only some of the $30,000 is net paychecks. A portion goes to your employee share of payroll taxes. Nevertheless, the wages expense account indicates $30,000 while the employment taxes expense account records only the company’s share of payroll taxes. The liability account on the company’s balance sheet reveals total employee plus company portions of payroll taxes until remitted.
The Finance Writer 