Understanding How Payroll Taxes Fit into Your Chart of Accounts

What is a Chart of Accounts?

Before diving into payroll taxes, let’s quickly recap what a chart of accounts (COA) is. Your COA is a list of all the financial accounts in your company’s general ledger. It’s the backbone of your accounting system, organizing your finances into different categories such as assets, liabilities, income, and expenses.

Payroll Taxes: An Overview

Payroll taxes include various taxes that both employers and employees must pay. These taxes typically include:

• Federal Income Tax Withholding
• Social Security and Medicare Taxes (FICA)
• Federal Unemployment Tax (FUTA)
• State Income Tax Withholding
• State Unemployment Tax (SUTA)

Structuring Payroll Taxes in the Chart of Accounts‍

To ensure payroll taxes are recorded correctly in your financial statements, they should be categorized appropriately within the COA.

1. Wages and Salaries Expense

• This account records the gross wages and salaries paid to employees before any deductions.
• On the income statement, this will appear as an expense, reducing net income.

2. Payroll Tax Expense

• Employer-paid taxes should be recorded separately for clarity, such as:
  • Employer FICA Taxes
  • Employer FUTA Taxes
  • Employer SUTA Taxes
• These accounts represent expenses on the income statement.
• Depending on the business, other payroll-related expenses, such as employee benefits or workers' compensation, may also be recorded under payroll expenses.

3. Payroll Liabilities

• Employee payroll tax withholdings should be recorded as a liability because they are collected from employees but not yet paid to tax agencies.
• These liability accounts typically include:
  • Employee Payroll Tax Withholdings Payable – for federal and state income taxes, employee FICA deductions
  • Payroll Tax Payable – for employer tax obligations (FICA, FUTA, SUTA)
• Alternatively, some businesses may choose to have a single Payroll Liabilities Payable account instead of tracking individual tax liabilities separately. This simplifies accounting but may reduce visibility into specific tax obligations.
• These liabilities appear on the balance sheet until the tax payments are remitted.

Recording Payroll in the Accounting System‍

Here’s a step-by-step approach to recording payroll transactions in a single journal entry:

‍1. Recording The Entire Payroll Expense as a Liability

‍Since payroll is due the moment the pay period ends, the easiet way to record payroll and all it's liabilities is to record a single payroll entry that includes all the expenses and withholdings as needed for your particular payroll situation. Here is a simplified journal entry to break it down. If you have additional expenses such as payroll fees, or if you want to break down all your tax liabilities, you can add those accounts in your journal as needed.

‍Entry for Payroll Processing:

‍Debit: Wages and Salaries Expense: $10,000
Debit: Employer Tax Expense: $915
Credit: Gross Payroll Liabilities Payable: $10,915

‍2. Offsetting the Liability with Payroll Funds from the Bank

‍When payroll is processed, withdrawn from the bank, and paid the liability account is reduced:

Debit: Gross Payroll Liabilities Payable: $10,915
Credit: Cash/Bank Account: $10,915

Example Journal Entries

Let’s say your company’s gross payroll for a pay period is $10,000, with the following withholdings and taxes:

• Employee federal income tax withholding: $1,500
• Employee FICA (Social Security and Medicare): $765
• Employer FICA: $765
• FUTA: $42
• SUTA: $108

Recording Payroll Liabilities in a Single Entry:

‍Debit: Wages and Salaries Expense: $10,000
Debit: Employer Tax Expense: $915
Credit: Payroll Liabilities Payable: $10,915

‍Paying the Payroll Liability

‍Debit: Payroll Liabilities Payable: $10,915
Credit: Cash/Bank Account: $10,915

Now, let's record a detailed entry using the same information:

Recording Payroll Liabilities in a Detailed Entry:
‍
Debit: Wages and Salaries Expense: $10,000
Debit: Employer FICA : $765
Debit: Employer FUTA: $42
Debit: Employer SUTA: $108
Credit: Federal Withholding Payable: $1500 (withheld from the original $10,000 wages)
Credit: Employee FICA Witholding Payable: $765 (withheld from the original $10,000 wages)
Credit: Employer FICA Payable: $765 (in addition to the original $10,000 wages)
Credit: Employer FUTA Payable: $42 (in addition to the original $10,000 wages)
Credit: Employer SUTA Payable: $108 (in addition to the original $10,000 wages)
Credit: Net Payroll Payable: $7735 (this is what remains from the original $10,000 in wages)

Paying the Payroll Liability

Then when the net wages and taxes are paid you would:

Debit: Federal Withholding Payable: $1500
Debit: Employee FICA Witholding Payable: $765
Debit: Employer FICA Payable: $765
Debit: Employer FUTA Payable: $42
Debit: Employer SUTA Payable: $108
Debit: Net Payroll Payable: $7735
Credit: Cash/Bank Account: $10,915

Note, you may need to split your withdrawal according to the detailed liability payments that may be combined in one or more withdrawals made by your payroll processor.

When running a business, payroll taxes are a critical component that needs to be managed properly. Not only do you need to pay your employees accurately, but you also have to ensure that the associated taxes are recorded correctly in your accounting system. Additionally, some businesses may have other payroll-related expenses beyond taxes, such as benefits or workers’ compensation. If managing payroll entries seems complex or overwhelming, SpeedyLedgers can help. Consider hiring a professional bookkeeper to streamline your payroll accounting system so you can focus on more profitable tasks like sales, marketing, or operations.