Are Payroll Withholding Taxes an Expense or Liability
Payroll withholding taxes are considered a liability, not an expense. When an employer withholds taxes from an employee’s paycheck, the employer is essentially collecting taxes on behalf of the employee and is required to remit those taxes to the appropriate government agencies. These taxes do not represent an expense for the company because they are not a cost incurred in the production of goods or services.
Example of Are Payroll Withholding Taxes an Expense or Liability
Let’s take a look at an example of recording payroll withholding taxes as a liability. Suppose a company has the following payroll information for one of its employees:
- Gross salary: $5,000
- Federal income tax withheld: $1,000
- Social Security tax withheld: $310
- Medicare tax withheld: $72.50
- State income tax withheld: $150
The journal entry for this payroll would look like this:
- Debit Salary Expense: $5,000
- Credit Federal Income Tax Payable: $1,000
- Credit Social Security Tax Payable: $310
- Credit Medicare Tax Payable: $72.50
- Credit State Income Tax Payable: $150
- Credit Net Pay Payable (Cash or Bank): $3,467.50
In this example, the total salary expense for the company is $5,000 (the employee’s gross salary). The company records the withheld taxes as liabilities, not as expenses, until it remits those funds to the appropriate government agencies. The net pay payable to the employee is $3,467.50, which represents the remaining amount after withholding taxes.
