Federal Income Tax Withholdings Payable

Federal income tax withholdings payable is a current liability account that records the federal income tax an employer has deducted from its employees' wages but has not yet paid over to the United States Treasury. The money belongs to the employees, who are paying their own tax through the employer, and the employer acts only as a collection agent. Until the tax is deposited, the employer owes it to the government, so it sits on the balance sheet as a liability.

The account is one of several payroll liabilities. Others include Social Security and Medicare taxes withheld, the employer's matching share of those taxes, federal and state unemployment taxes, and state and local income tax withheld. The general concept of tax collected at source is described in the entry on withholding tax.

Each employee completes Form W-4, which tells the employer their filing status, any dependents and any extra withholding they want. The employer then applies the tables and methods in IRS Publication 15-T to each employee's taxable wages for the pay period. The result depends on pay frequency, pre-tax deductions such as traditional 401(k) contributions, and the employee's W-4 choices. Withholding is an estimate: employees settle the exact amount of income tax they owe when they file their annual return.

Suppose a small company's biweekly payroll shows gross wages of $40,000. It withholds $4,800 of federal income tax, $2,480 of Social Security tax at 6.2 percent, $580 of Medicare tax at 1.45 percent and $1,200 of state income tax. On payday it records:

• A debit to salaries and wages expense for $40,000.
• A credit to federal income tax withholdings payable for $4,800.
• Credits to Social Security tax payable for $2,480, Medicare tax payable for $580 and state income tax withholdings payable for $1,200.
• A credit to cash, or salaries payable, for the net pay of $30,940.

The withholding itself is not an expense to the employer, because it is part of the employee's gross wages. The employer's own matching Social Security and Medicare taxes are recorded separately as employer payroll taxes. When the company deposits the tax, it debits federal income tax withholdings payable for $4,800, along with the other federal payroll tax liabilities, and credits cash.

Employers must deposit withheld federal income tax, together with Social Security and Medicare taxes, electronically through the Electronic Federal Tax Payment System. The IRS assigns each employer a deposit schedule based on its total tax liability in a lookback period. Most employers are either monthly depositors, who pay by the 15th of the following month, or semiweekly depositors, who pay within a few days of each payday. Employers that accumulate $100,000 or more of liability on any day must deposit by the next business day.

Employers report these amounts on Form 941 each quarter, or Form 944 annually for some very small employers, using their employer identification number. After the year ends, each employee receives a Form W-2 showing total wages and tax withheld, and copies go to the Social Security Administration.

Because withheld taxes are held in trust for the government, failing to deposit them is treated more harshly than most unpaid debts. Late deposits attract penalties of 2 to 15 percent depending on how late they are, plus interest. Under Internal Revenue Code section 6672, the IRS can also impose the trust fund recovery penalty, equal to the full amount of unpaid withheld tax, personally on owners, officers or bookkeepers who were responsible for paying it and willfully failed to do so. For this reason auditors and lenders look closely at whether payroll tax liabilities are being paid on time, and a growing balance in this account can be an early sign of cash trouble. Good practice includes reconciling the account to Form 941 each quarter, part of the wider account reconciliation routine, and making sure accrued payroll at period end includes the related withholdings.

• Internal Revenue Service: Employment taxes