Payroll Liabilities and
Tax Records
Making Accounting Relevant
Federal, state, and local governments
pass tax laws in order to generate
revenue for government services.
Can you name some uses for
your tax dollars?
JOURNALIZING AND POSTING
PAYROLL
What You’ll Learn
 How to compute the business
payroll deductions.
 How to record the payroll entry in
the general journal.
Payroll Basics
 Employees, ranging from
design engineers at Ford
Motor Company to the
waitresses at a neighborhood
coffee shop, expect their
payroll checks to arrive on
time and be accurate!
 Employee earnings are a
normal operating expense of
every business.
Analyzing the Payroll Transaction
 The business has to keep accurate
payroll records. Therefore, JOURNAL
ENTRIES summarizing all of the
payroll details must be recorded each
pay period.
 First let’s look at the debit!
•
The total earnings of all of your
employees are recorded under an
account called Salaries Expense.
Analyzing the Payroll Transaction
• What about the credits?
• Various deductions, such as income
and FICA taxes, are withheld from
gross earnings each pay period.
– The employer retains the amounts withheld
until it is time to pay the appropriate
government agencies and businesses.
– The amounts withheld but not yet paid are the
liabilities, or the amounts owed, of a business.
Each part of the payroll liabilities are recorded
in their own separate account.
– Liabilities all have normal credit balances.
Journalizing the Payroll
JOURNAL ENTRY
Does the employer owe taxes
too?
• YES, THEY DO!
• In ADDITION to the amounts
withheld from employees’ payroll
checks, the employer owes taxes
based on the weekly payroll.
• These taxes are also liabilities of
the business.
The Employer’s FICA Taxes
 The current rates are 6.2% for social
security tax and 1.45% for Medicare
tax.
 The employer and the employee pay
social security tax on gross earnings
up to the maximum taxable limit per
employee.
 The employer and the employee pay
Medicare tax on all gross earnings;
there is no maximum taxable limit.
Federal and State Unemployment
Taxes
 The Federal Unemployment Tax Act
(FUTA) and the State Unemployment
Tax Act (SUTA) require employers to
pay federal and state unemployment
taxes.
 The maximum federal unemployment
tax is 6.2% on the first $7,000 of an
employee’s annual wages.
 State unemployment tax rates and
maximum taxable amounts vary
among states.
Journalizing the Employer’s
Payroll Taxes
 The employer’s payroll taxes are
business expenses recorded in the
Payroll Tax Expense account.
 Use the Social Security Tax Payable
and the Medicare Tax Payable
accounts to record both the
employees’ and the employer’s FICA
taxes.
 Record the employer’s unemployment
taxes in the Federal Unemployment
Tax Payable and State Unemployment
Tax Payable accounts.
Journalizing the Employer’s
Payroll Taxes (cont'd.)
JOURNAL ENTRY
Paying the Payroll Tax Liabilities
Business owners must pay their payroll
liabilities and file payroll tax reports
promptly and accurately.
FICA and Federal Income Taxes
One payment is made for:
 Social Security and Medicare taxes (both
the employees’ and the employer’s shares)
and
 employees’ federal income taxes withheld.
The Federal Tax Deposit Coupon (Form
8109) is prepared and sent with the check.
The form identifies the type of tax and the
tax period.
 Separate payments and journal entries are
used to record the other payroll taxes.
Payment of Federal Payroll Tax
Liabilities
JOURNAL ENTRY
Payment of State Income Taxes
JOURNAL ENTRY
Payment of Federal
Unemployment Taxes
JOURNAL ENTRY
Payment of State Unemployment
Taxes
JOURNAL ENTRY
Payment of Other Payroll
Liabilities
For example:
 insurance premiums
 union dues
 charitable contributions
JOURNAL ENTRY
Preparing Payroll Tax Reports
 Forms that employers must complete:



Form W-2 summarizes an employee’s
earnings and withholdings for the
calendar year.
• Employees must receive these by
January 31 of the following year.
Form 940 is used to report the employer’s
unemployment (state and federal) taxes.
Form 941 is the employer’s quarterly
federal tax return on which accumulated
amounts of FICA and federal income tax
withheld from employees’ earnings, as
well as FICA tax owned by the employer,
are reported.
Transmittal of Wage and Tax
Statements
• Employers must file a Form W-3 with
the federal government by February 28.
• This form summarizes the information
contained on the employees’ W-2.