Payroll Deductions as Liabilities Vs. Payroll Expenses
Liabilities and expenses play key role's as part of your small business's payroll accounting system. These items are included as separate lines in your payroll journal entry. Expenses and liabilities in the payroll journal entry offset one another. The amount in the expense account is your total payroll amount for the pay period. The amount in each liability account tells you either the amount deducted from your employees' pay or the amount you owe and to whom you must send the money.
Business owners use the payroll expense account and the payroll tax expense account to record payroll-related expenses. The payroll expense account shows the sum of the gross pay for your employees for a pay period. Gross pay is the amount you owe your employees in exchange for the work they do for your company. The payroll tax expense account shows the sum of the taxes your company owes to the IRS.
Most payroll deductions are liabilities because you owe the money you subtract from your employees' gross pay to a third party. Common types of deductions are tax withholdings and benefit deductions. Forward taxes deducted to the proper city, county, state or federal tax authority. Benefits are non-cash compensation like insurance, retirement and union dues. Employees contribute part or all of the payment for benefits through payroll deductions. After you subtract all deductions from your employee's gross pay, the remaining balance is net pay. You pay net pay to your employees from cash.
The payroll expense account amount represents your company's total salary expenditure for a pay period. This expense account is offset by the liability accounts. The liability accounts breaks up the expense account amount and tells you what each part of the expense is for. Payroll liability account names end with “payable.” “Payable” is a signal that you must pay the amount in the account to a third party. Increase the payroll expense account with a debit, and increase the payables account with a credit. Debits and credits are always equal. The formula is: Payroll Expense (debit) = Sum of Payables (credit) + Cash (credit). If your company records the payroll entry before paying the payroll, use the account "salaries payable" instead of the cash account. Move the amount from salaries payable to cash after you pay your employees.
In addition to the taxes you withhold from employees' pay, you must pay the employer's half of the FICA tax, unemployment taxes and possibly additional taxes that vary according to your jurisdiction. The payroll tax expense amount is the total amount you must pay in taxes, the payable liability accounts tell you where the payroll tax expense money goes. Debits and credits are always equal. The formula is: Payroll Tax Expense (debit) = Sum of Paybles (credit).