What are Federal Income Tax Withholdings Payable?

Federal Income Tax Withholdings Payable

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Federal Income Tax Withholdings Payable

Federal Income Tax Withholdings Payable is a liability account that represents the amount of income taxes that a company has withheld from its employees’ wages or salaries and is obligated to remit to the federal government.

Here’s how it works:

When a company pays wages or salaries to its employees, it is required by law to withhold a certain amount of money from those payments for income taxes. The specific amount to be withheld depends on the employee’s earnings, their filing status, and the information they provided on their Form W-4.

The company then holds these withheld amounts until it is time to remit them to the government, usually on a periodic basis (e.g., monthly or quarterly). During this time, the amounts withheld are recorded as a liability on the company’s balance sheet, because it’s money the company owes but has not yet paid. This liability is what’s referred to as Federal Income Tax Withholdings Payable.

It’s important to note that these withholdings represent the employees’ contributions to their own income tax obligations, not the company’s corporate income tax liability.

Example of Federal Income Tax Withholdings Payable

Imagine you run a business named XYZ Corp. and you have one employee, John. John earns $4,000 per month as salary. Based on John’s Form W-4 and the IRS tax tables, you determine that you need to withhold $800 from John’s monthly paycheck for federal income tax.

So, you pay John a net amount of $3,200 ($4,000 gross earnings – $800 tax withholding), and the $800 is recorded in your accounting system as Federal Income Tax Withholdings Payable.

After three months, before you make the quarterly payment to the IRS, your balance for Federal Income Tax Withholdings Payable would be $2,400 ($800 withheld per month x 3 months). This represents the amount you owe to the government on behalf of John’s income tax withholdings.

When you remit this payment to the IRS, you would decrease (credit) your cash account by $2,400 and decrease (debit) the Federal Income Tax Withholdings Payable by the same amount, thus bringing the payable account back to zero until you again withhold taxes from John’s next paycheck.

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