How to account for tax withholding
pentape
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!
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@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?
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.
@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.
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?
@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
I think I've got it! Thank you very much for your help.
Following this thread - I can't seem to split my payroll check to my employee after this new upgrade. Very confused. I just hired and paid salary and wages, then withheld a portion for FICA and a portion for FIT. I am unable to do this in the "split" window. No items are available, and when I choose "payroll - tax" or "payroll - liabilities" I still can't change the sign to make them reduce the original salary and wages entry.
@ashesofgrace,
I'm not sure why you are trying to reduce Wage Expense. Employers get a deduction for gross wages and employer share of FICA.
@Mikeg I'm not. I'm trying to split the check that came over from the bank import into it's respective categories. That means a check for $137.50, that actually was paid at $121.98 (after FICA & FIT) [US company], needs to be split into a $137.50 gross, with deductions. I'm reading other comments and trying to figure it out, and put in a test entry for my accountant to review, so we can try to figure out how to best put this into Wave. Until now, I've primarily paid contractors, but we just hired an employee.
@ashesofgrace,
I would categorize the net check as salary expense. Then do the following entry based on what you provided.
Debit salary expense 137.50
Debit FICA Exp 10.52
Credit Payroll taxes payable 26.04
Credit salary expense 121.98
Salary expense should be 137.50 and you have a payroll tax payable of 26.04
When you remit your taxes you categorize the payment against the liability.
Your accountant should be able to help you through this.
How is payroll tax tagged in Wave then? There is only a tag for "payroll employer taxes" and I am not clear whether that means taxes owed by the employer or taxes paid by the employer (i.e. taxes owed by employer + employee taxes withheld). I assume Net Pay is tagged as "Payroll - Salary & Wages", but am not clear on the tax portion, as my payroll company (Gusto) deducts all taxes (employer and employee) and net pay as separate transactions.
@fait,
That is how it is typically done for outside payroll providers. You will usually see 2 debits from accounts. One for the net to employees and one for taxes (both employee and employer). What I do for my clients, I code all net checks to Salary and Wages and all taxes to Employer taxes. When the income statement needs to corrected, like for annual business filings, I will make a journal entry to move the employee portion of taxes paid through the debits to Salary & Wages. That my gross agrees back to the W-2 and employer tax expense agrees back to the reports that any of the payroll companies report. Since Wave offers a payroll service they post a gross to net entry on the businesses Wave accounting.