federal withholding payable

In the previous post, we defined and calculated gross pay, payroll taxes, and net pay. In this post, we will discuss how to record the paycheck and the employer taxes.

You might be wondering why this is in the liabilities section of the course. So far we have discussed wage and salaries expense and payroll tax expense. How are liabilities involved?

Once you write the check for $371.28 and you have withheld taxes, those taxes that you have withheld from the check are due to the government. Those taxes represent a liability to the company because the company has an obligation to pay those taxes on behalf of the employee. Also once the employee is paid, the employer has the  obligation to pay the employer portion of the taxes. Because of these obligations, this is why you typically see these topics covered in the liabilities section of your accounting textbook.

Let’s look at what we calculated in the previous post. We calculated the net pay that an employee would receive:

PT1

We also calculated the amount of taxes that the employer would need to pay.

PT2

Now that we have those figures, we need to record this as journal entries. We are going to record this in two pieces. First, record the paycheck then record the employer taxes.

To record the entry for the paycheck, we need to consider a few things:

  • The wage expense
  • The cash paid to the employee
  • The taxes that will be paid later to the various government agencies

The wage expense is the total cost of labor incurred by the company. Wage expense is typically the gross wages paid to the employee. In this case, $480.

Although the wage expense is $480, how much did the employee actually receive? The net pay is $371.28. That is the amount of cash paid to the employee and the amount that the company’s cash will decrease by.

The difference between the gross pay and the net pay is the taxes that were withheld from the employee’s pay. This amount will be recorded as various liabilities.

Here is the journal entry to record the payment of the paycheck:

PL1

Notice the Wage Expense is debited for the gross pay. We have credited a liability account for each of the tax amounts. Sometimes you will see all the taxes lumped together into one account called Payroll Taxes Payable. We have also credited Cash for the amount of the net pay.

The entry to record the employer portion of the taxes is similar to the entry above except no cash is paid at the time the entry is recorded. We must record the liabilities that will be paid and the company expense.

PL2

The total amount of company expense is $58.80 because the is the total amount of tax that the company incurred. Use the same payable accounts for Social Security and Medicare. We also added two new payable accounts for the two different unemployment taxes.

Final thoughts

When working on payroll problems, first calculate the amount of the payroll and employer expenses. This will make doing the journal entries so much easier. It might seem like more work but it will save you time and confusion in the long run because everything is laid out for you.

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