Payroll Taxes Payable

Payroll taxes payable is a liability account that records payroll taxes a business owes to federal, state and local governments but has not yet paid. It covers two kinds of amounts: taxes withheld from employees' wages, such as income tax and the employee share of Social Security and Medicare, which the employer holds on the government's behalf; and the employer's own taxes, such as its matching Social Security and Medicare and federal and state unemployment taxes. Because these amounts are normally paid within days or weeks, they are reported among current liabilities on the balance sheet.

Many companies keep separate accounts for each tax, such as FICA taxes payable, federal income tax withholdings payable, state withholding payable, FUTA payable and SUTA payable, and combine them into one line in the financial statements. Keeping them separate makes it easier to match each liability to the return and deposit it relates to.

Each payroll creates two journal entries. The first records wages and the amounts withheld from employees; the second records the employer's own payroll tax expense. Both credit payroll taxes payable. When the business deposits the taxes, it debits the liability and credits cash. The liability therefore builds up between payroll dates and deposit dates, and any balance outstanding at the end of a period is a current liability.

A company's biweekly payroll has gross wages of $80,000, none of which exceeds the Social Security wage base. It withholds $9,600 of federal income tax and $6,120 of employee FICA (7.65 percent). Its own payroll taxes are employer FICA of $6,120, net FUTA of $480 on wages still under the $7,000 limit, and state unemployment tax of $2,160.

• Entry 1: debit salaries and wages expense $80,000; credit federal income tax withholdings payable $9,600; credit FICA taxes payable $6,120; credit cash or wages payable $64,280.
• Entry 2: debit payroll tax expense $8,760; credit FICA taxes payable $6,120; credit FUTA payable $480; credit SUTA payable $2,160.

Total payroll taxes payable from this payroll are:

Here the first term is $9,600 plus $6,120, or $15,720, and the second is $8,760, from the employer payroll taxes entry above, giving $24,480. When the company deposits the federal income tax and FICA of $21,840, it debits those liabilities and credits cash. The FUTA and SUTA balances stay on the books until their quarterly due dates.

Federal income tax withholding and FICA are deposited electronically on a monthly or semiweekly schedule, depending on the size of the employer's past liabilities, under rules set out in IRS Publication 15, known as Circular E. Very large amounts, $100,000 or more accumulated on any day, must be deposited the next business day. These taxes are reported quarterly on Form 941. Net FUTA is deposited quarterly once it exceeds $500 and reported annually on Form 940; the rules for this tax are covered in the entry on the federal unemployment tax (FUTA). State taxes follow each state's schedule.

Because withheld taxes are trust fund money, a growing balance of payroll taxes payable can be a warning sign that a business is using them to fund operations. The Internal Revenue Service can hold responsible individuals personally liable for unpaid trust fund taxes, and late deposits trigger penalties of 2 to 15 percent plus interest. Accounting errors include forgetting to accrue the employer's share of taxes on wages earned but unpaid at period end, which should be included in accrued payroll, and failing to reconcile the liability accounts with Forms 941 and W-2 each quarter. A reconciliation should show that the opening balance plus taxes recorded, minus deposits made, equals the closing balance, which matches the amounts still due on the next return. Other withholdings, such as 401(k) payable, are separate liabilities and not taxes.