Hi Everybody,
It’s Friday; not Tuesday. Sorry again for the delay and our temporary inability to keep up with our posts on a weekly basis. Well! lately we have been pretty busy with work, especially quite a few business events with both of our local Chambers of Commerce that we are currently participating in. To be more specific, feel free to stop by if you are in Westport Plaza area in St. Louis MO, we will be in the band and playing the all time favorite songs such as Hotel California, Desperado, Faithfully, etc. Click the following link for more detail 2016 MHCC Pub Crawl
Now it’s tax time —Besides the complication of Sales Tax previously mentioned on our last post, accounting for payroll or employment taxes can also be very tricky, especially if you have your payroll functions outsourced. But isn’t out sourcing payroll supposed to make it easier?! Well, it should, but that all depends on how your account is set up with your payroll company and how well your general ledgers can be integrated. Most payroll companies bill first for direct deposits made to employees, then for the tax payments and last for payroll processing fees, so there is an average of 3 withdrawal transactions per pay period. The trouble with that is those expenses seem to be often and easily mis-classified among wages, payroll taxes, and payroll liabilities accounts. Let’s take a look at an actual scenario below:
If an employee makes $2,000.00 a month, their take home pay is actually less than that. Taken out of their gross pay is usually both federal and state withholding tax and local (if applicable), in addition to medicare, and social security tax. The amount that they will pay in federal and state withholding tax will vary, depending on how their W-4 forms were completed, but the employer’s cost will not change based on each employee individual tax situations. The amount on the books for wage for any employee paid $2,000.00 a month will always be $2,000.00. For clarity’s sake, here is an example of the breakdown that can be made for this transaction as the first journal entry. Please note that I am choosing arbitrary numbers for the withholding tax.
4/30/2016 Wages expense $2,000.00
Federal Withholding tax liability* $200.00 (assuming 10%)
Social Security liability* (6.2%) $124.00
Medicare liability* (1.45%) $29.00
State Withholding tax liability* $100.00 (assuming 5%)
Cash $1,547.00
*This represents accrued payroll liabilities incurred when payroll is run, but the taxes are paid at a later date, for instance quarterly. When these taxes are paid, the payroll liability account is debited and cash is credited. Thus, no portion of the wages is ever classified as a tax expense.
When it comes to payroll taxes the employer has their own separate responsibilities, above that which is taken out of the employee’s paycheck. The employer is responsible for matching the medicare and social security taxes and for paying state and federal unemployment taxes. These are expenses that are coming directly out of the company’s pocket, so they are considered payroll tax expenses. Let’s look at the second part of the above journal entry.
4/30/2016 Payroll Tax Expenses** $235.20
Federal Unemployment tax liability* (0.6%; Capped at $7K) $12.00
Social Security Employer liability* (6.2%; Capped at $118,500) $124.00
Medicare Employer liability* (1.45% generally; No capped amount) $29.00
State Unemployment tax liability*(3.51% for new businesses in Missouri; Capped at $13K) $70.20
*This represents accrued payroll liabilities incurred when payroll is run, but the taxes are paid at a later date, for instance quarterly. When these taxes are paid, the payroll liability account is debited and cash is credited. Thus, and again, no portion of the wages is ever classified as a tax expense.
**This account can be broken down into the individual types of taxes, however to keep this journal entry simple, all tax accounts have been consolidated into one payroll tax expense account.
The good news about this is that when all of these expenses are properly captured, not only can all actual payroll tax expenses correctly be deducted on your business tax return, but business financials will also be appropriately represented when making decision or performing the analysis.
Hope this helps when dealing with payroll transactions and its taxes. However, if you still need help, please do not hesitate to reach out!
Chelsea Auton
The Volpe Consulting & Accounting Team
Sources: https://www.irs.gov/publications/p535/ch05.html#en_US_2015_publink100020883
