Understanding employer payroll taxes

Definition

Employer payroll taxes are the extra tax the business itself owes because people are on payroll. On the books, this is an expense that sits on top of wages, not a slice taken from the paycheck.

The employee share of Social Security and Medicare is withheld from take-home pay. This cost is the clinic's matching share, plus unemployment tax, that never appears on the stub as a deduction.

Accrual books record the extra in the same period the wages are earned. Cash-basis books may wait until the tax deposit leaves the bank.

This cost is the employer's own tax. It is not the wage, and it is not the money held back from the employee.

Where it shows up

P&L: Located with payroll cost, on top of wages.

Balance sheet: Related to the unpaid tax sitting in current liabilities until the deposit goes out.

Cash flow: Decreases in payroll tax liability, reported cash from operating activities decreases.

See also: Payroll Tax Liability · Payroll Expense · Labor Burden

When you look at your Income Statement, this extra sits with payroll cost, next to wages. For billable staff, it often rides with cost of services; for office staff it usually sits in operating expenses.

A high extra this month means wages were high, or a rate changed. A low extra means hours were light, or the deposit already cleared a prior accrual.

The Balance Sheet does not keep this cost as an asset. The unpaid piece sits in payroll tax liability, a current liability, until the agency is paid.

On the Statement of Cash Flows, the tax deposit is the cash event. Cash from operating activities falls when the remittance leaves, and the liability falls with it.

Labor burden is the wider extra on top of base wages. This tax is one layer of that extra, next to benefits and insurance.

How it works

The staff work a week of client work. Base wages are one cost; the employer tax on those wages is this cost.

Typical pieces of this cost include:

• Employer Social Security and Medicare (the matching FICA share)
• Federal unemployment tax (FUTA)
• State unemployment tax (SUTA)

The payroll register (or the tax tables behind it) computes the employer share of Social Security, Medicare, and unemployment. Those dollars are owed even if the deposit date is next week.

If the deposit has not gone out, the bookkeeper debits this cost and credits payroll tax liability. The extra is already an expense, even though cash has not moved.

Employee withholdings credit the same payable, but they are not this cost. Those dollars were part of gross wages and were held back from take-home pay.

Stay with the employer's own tax. The wage is what the staff member earned; this line is only what the firm adds for the agencies.

A payroll accrual at month end should include the extra on hours that crossed the close. Accrued payroll holds unpaid wages; this cost's unpaid piece belongs in payroll tax liability.

Do not treat the tax deposit as a second expense if the extra was already accrued. The deposit clears the liability; this cost was recorded when the wages were earned.

After the week closes, the extra that belongs to that work has already hit the P&L. Paying it later is a Balance Sheet and cash event.

Tie the expense and the payable to the register and to the filed returns. A leftover that does not match the next deposit is hard to defend.

Example

Harbor Clinic pays its two staff members every Friday. This week's gross wages are $5,000.

The employer share of Social Security, Medicare, and unemployment tax on that run is $400. The tax deposit is due the following week.

The clinic records the extra:

Debit: Employer payroll taxes $400

Credit: Payroll tax liability $400

This cost hits the P&L by $400, and payroll tax liability goes up by $400. Cash has not moved.

The Income Statement now includes $400 on top of the $5,000 wage. The Balance Sheet holds that $400 with any employee withholdings from the same run until the deposit goes out.

When Harbor Clinic remits the tax, it clears the liability and cash falls. This cost stays at $400; only the payable and the bank account move.

Common mix-ups

Employer payroll taxes are not the amounts withheld from the paycheck. Withholding is the employee's share, taken from take-home pay; this cost is the firm's own extra.

Employer payroll taxes are not payroll tax liability. This line is the expense; the liability is the unpaid tax sitting on the Balance Sheet.

Employer payroll taxes are not the tax deposit. Recording the extra raises the owe; sending cash later only settles that owe.

Related terms

• Payroll Tax Liability: Withheld and employer payroll taxes owed to tax agencies.
• Gross Wages: Total pay earned by an employee before withholdings.
• Labor Burden: The payroll taxes, benefits, and insurance layered on top of base wages.
• Payroll Expense: The wage cost of employees recorded on the income statement.
• Payroll Journal Entry: The entry that books a payroll run into the general ledger.
• Payroll Register: The per-run report listing each employee's gross pay, deductions, and net pay.
• Employee Benefits Expense: The cost of health coverage, retirement match, and similar employee programs.
• Accrued Payroll: Wages earned by employees but not yet paid at the end of a period.