By: Ruth King
One of the easiest ways to tell that your financial statements are wrong is to see negative payroll taxes in the current liabilities section of the balance sheet. Negative payroll taxes payable mean that the government owes you money – not likely unless you’ve made a huge mistake.
Unfortunately, I see this too often.
Here are the mechanics of payroll tax payments as they relate to profit and loss statements and balance sheets.
- Employees get a certain hourly wage or salary each week. This is a profit and loss expense item – either in direct expense for your field employees or overhead expense for office and officer employees.
- Employees pay a certain percentage for FICA and Medicare taxes. This is a balance sheet item – you withhold the money on their behalf and pay it to the government every week.
- Employers MATCH the FICA and medicare taxes that the employee pays. This is a profit and loss expense item. You get to pay the match to the government every week.
- Employers withhold other amounts from employees’ checks – withholding taxes, garnishments, 401K payments, etc. These are balance sheet items – not profit and loss expenses.
- Employers are liable for state and Federal Unemployment taxes. They are not deducted from employee checks. They are a profit and loss expense item.
Let’s make this assumption. I am doing the entries one at a time. Most payroll companies summarize the entries (i.e. federal payroll taxes payable is for withholding and FICA & medicare).
First, employee Steve’s payroll:
- Steve earned $1,000 this week.
- His FICA and Medicare deduction is $76.50.
- Your company matches the $76.50 as a P&L expense.
- His state income tax withholding is $100.
- His Federal income tax withholding is $200.
- He has a child support garnishment of $150 a week.
The journal entries you make into your accounting software:
Wages $1,000
FICA & Medicare payable $ 76.50
State Withholding payable $ 100
Federal Withholding payable $200
Garnishment payable $150
Cash paid to employee $473.50
Both sides add to $1,000. Notice the only P&L expense is Steve’s wages. Everything else is a balance sheet item.
Second, enter the payments you are required to make as an employer:
Employer FICA and Medicare expense $76.50
FICA & Medicare payable $76.50
State unemployment tax expense $20.00
State unemployment tax payable $20.00
Federal unemployment tax expense $7.00
Federal unemployment tax payable $7.00
Expense amounts are P&L expenses. Payable amounts are balance sheet, current liabilities accounts.
Third, pay the liabilities due (they are normally paid when you pay payroll)
FICA& Medicare payable $153.00
State unemployment payable $20.00
Federal unemployment tax payable $7.00
Garnishment payable $150.00
Federal withholding payable $200.00
State withholding payable $100.00
Cash out $630.00
FICA & Medicare payable is for both the employee amount and the employer amount.
You’ll notice at the end of these three journal entries, the amount payable is zero…which is correct when you pay your taxes when payroll is paid. Most payroll companies require that they be paid at the same time.
When you make these entries into your accounting system, your balance sheet should not show negative numbers in the current liability section of the balance sheet. Assuming you pay the liabilities every week, the payables should be zero.
Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.
