Payroll Tax Expenses and Accrual Methods

As an employer, you are responsible for withholding payroll taxes from employee earnings and remitting these amounts periodically to the appropriate agencies along with employer contributions. You also pay a variety of employment taxes that do not get withheld from employee paychecks, but rather come out of business revenue. Because most employers pay employees more regularly than they have to pay tax agencies, these tax liabilities accrue over time. However, the schedule and process for accounting for these tax obligations depends on the accounting convention that you use.

The cash method of accounting involves recording each transaction as a sale or an expense when the money changes hands rather than when the sale or purchase is made. A business that uses the cash method will write off payroll expenses when the payroll checks are written rather than at the end of the pay period, and it writes off payroll tax amounts after filing and paying periodic payroll tax forms rather than recording these liabilities weekly as they accrue.

The accrual method of accounting involves listing each transaction as a sale when it takes place regardless of when the payment changes hands. Employers who use the accrual method record payroll amounts as expenditures as the hours are worked and the payroll expense is accrued rather than when the paychecks are written. Similarly, payroll tax liabilities accrue throughout the pay period even though you may only pay them monthly or quarterly.

If you use the cash method of accounting, the amounts your owe in payroll taxes do not count as expenses that offset your revenue until you pay them. As a result, the net income that you report on your income tax return may be artificially inflated, at least in the short term. Once you pay these taxes they will count as expenses and offset your gross revenue, lessening your reported profit and lowering your tax liability down the line.

If you use the accrual method of accounting, you record your payroll taxes as expenses as you accrue them, regardless of when you pay them The net income that you report as your business earnings reflects the fact that you will eventually have to pay these payroll taxes even though they are not yet due. Using this accounting method, it is easier to keep track of what you owe rather than accidentally spending it.