Recording Employer Payroll Taxes
Employee Payroll Taxes
As we discussed, employers must pay to the government the taxes withheld from employee earnings.
The amounts withheld are liabilities to the business (payables) until they are actually paid to the
government. These employee payroll taxes include:
1. Federal Income Tax (based on withholding tables)
2. Social Security Tax (6.2% of earnings, with a cap on earnings of $127,200 in 2017)
3. Medicare Tax (1.45% of earnings, no cap)
Depending on where a business operates, there may also be state and local taxes. These are handled in
a similar manner to federal income taxes.
Employer Payroll Taxes
In addition, employers must pay several of their own payroll taxes. Employer payroll taxes are business
expenses. Most employers pay four separate payroll taxes, including:
1. Employer Social Security Tax (same amount as employee pays)
2. Employer Medicare Tax (same amount as employee pays)
3. Federal Unemployment Tax (0.8% of earnings for the first $7,000 earned)
4. State Unemployment Tax (5.4% of earnings for the first $7,000 earned)
Employer payroll taxes are paid to the government at a later date. However, the liability is incurred
when salaries are paid. Therefore, the transaction to record employer payroll taxes expense is
journalized on the same date the payroll is payroll is journalized. The General Journal is used to record
these items, as shown below.
SAMPLE PROBLEM
Record employer payroll taxes expense for an employee with earnings for the semimonthly pay period
ended April 15, 2017 of $750.00. The employee’s earnings have not yet hit any of the tax caps.
Social Security Tax Payable:
$750.00 x 0.062 = $46.50
Medicare Tax Payable:
$750.00 x 0.0145 = $10.88
Unemployment Tax Payable - Federal:
$750.00 x 0.008 = $6.00
Unemployment Tax Payable - State:
$750.00 x 0.054 = $40.50
Payroll Taxes Expense:
$46.50 + $10.88 + $6.00 + $40.50 = $103.88
GENERAL JOURNAL
2017
Date
April
PAGE 1
Account Title
15 Payroll Taxes Expense
Doc.
No.
M63
Post.
Ref.
Debit
1 0 3 88
Credit
Social Security Tax Payable
46
Medicare Tax Payable
1 0 88
Unemployment Tax Payable - Federal
Unemployment Tax Payable - State
50
6 00
4 0 50
PRACTICE PROBLEM
Record employer payroll taxes expense for an employee with earnings for the semimonthly pay period
ended April 15, 2017 of $1,100.00. The employee’s earnings have not yet hit any of the tax caps.
Social Security Tax Payable:
_________________________________________________
Medicare Tax Payable:
_________________________________________________
Unemployment Tax Payable - Federal:
_________________________________________________
Unemployment Tax Payable - State:
_________________________________________________
Payroll Taxes Expense:
_________________________________________________
GENERAL JOURNAL
Date
PAGE 1
Account Title
Doc.
No.
Post.
Ref.
Debit
Credit
Reporting Withholding and Payroll Taxes
IRS Form W-2: Wage and Tax Statement
Each employer who withholds Federal Income Tax, Social Security Tax, and Medicare Tax from employee
earnings must provide each employee with an annual report of these withholdings. The report shows
total year’s earnings and the amounts withheld for taxes for an employee. These amounts are obtained
from the employee earnings records. The report is prepared on Form W-2 and must be sent to each
employee by January 31 of the next year.
Note: this is the form that YOU receive every January and use to prepare YOUR personal income tax
return. We’ll go into more detail about preparing your own taxes next year!
IRS Form 941: Employer’s Quarterly Federal Tax Return
Each employer must file a quarterly federal tax return showing the Federal Income Tax, Social Security
Tax, and Medicare Tax due the government. This information is submitted every three months on Form
941. The information needed to prepare Form 941 is obtained from the employee earnings records.
Note: when preparing Form 941, the total earnings of all employees are multiplied by 12.4% for Social
Security Tax (6.2% for the employee portion and 6.2% for the employer portion) and 2.9% for Medicare
Tax (1.45% for the employee portion and 1.45% for the employer portion).
IRS Form W-3: Transmittal of Wage and Tax Statements
Form W-3 is sent to the Social Security Administration by February 28 each year. Form W-3 reports the
previous year’s earnings and payroll taxes withheld for all employees. Attached to Form W-3 is a copy of
each employee’s Form W-2.
Paying Withholding and Payroll Taxes
Employers must pay to the federal, state, and local governments all payroll taxes withheld from emploee earnings as well as the employer
payroll taxes. The payment of payroll taxes is referred to as a “deposit”. Most smaller businesses are considered monthly depositors and must
make these payments at the end of every month. Payments are journalized in the Cash Payments Journal. Three separate transactions are
completed: (1) Employee Income Tax, Social Security Tax, and Medicare Tax, (2) Unemployment Tax – Federal, and (3) Unemployment Tax –
State.
SAMPLE PROBLEMS
Paid cash for liability for Employee Income Tax, $757.00, Social Security Tax, $1,451.38, and Medicare Tax, $339.42; total $2,547.80. Check No.
347.
CASH PAYMENTS JOURNAL
2017
Date
March
PAGE 1
Account Title
31 Employee Income Tax Payable
Ck.
No.
Post
Ref.
347
General
Debit
Credit
Accounts
Payable DR
Purchases
Discount CR
7 5 7 00
Social Security Tax Payable
Cash
CR
2 5 4 7 80
1 4 5 1 38
Medicare Tax Payable
3 3 9 42
Paid cash for Federal Unemployment Tax liability for the quarter ended March 31, 2017, $34.60. Check No. 348.
CASH PAYMENTS JOURNAL
2017
Date
March
PAGE 1
Account Title
31 Unemployment Tax Payable - Federal
Ck.
No.
Post
Ref.
348
General
Debit
Credit
Accounts
Payable DR
Purchases
Discount CR
3 4 60
Cash
CR
3 4 60
Paid cash for State Unemployment Tax liability for the quarter ended March 31, 2017, $233.55. Check No. 349.
CASH PAYMENTS JOURNAL
2017
Date
March
PAGE 1
Account Title
31 Unemployment Tax Payable - State
Ck.
No.
349
Post
Ref.
General
Debit
2 3 3 55
Credit
Accounts
Payable DR
Purchases
Discount CR
Cash
CR
2 3 3 55
PRACTICE PROBLEM 1: Paying Withholding and Payroll Taxes
A cash payments journal is provided below. The following payroll data is for ABC Corp. for the monthly pay period ended March 31, 2017.
Date Paid
March 31, 2017
Federal Income Tax Withheld
$1,386.00
Employee Social Security Tax Withheld
$1,322.05
Employee Medicare Tax Withheld
$309.25
Credit balances on March 31 for the unemployment tax accounts for the first quarter are as follows: Unemployment Tax Payable – Federal, $511.75;
Unemployment Tax Payable – State, $3,454.34. ABC Corp. pays both unemployment taxes each quarter.
1. Prepare a journal entry for payment of the withheld taxes (in the table above). Use Check No. 383. (hint: uses 3 lines)
2. Prepare journal entries for the payment of the federal and state unemployment tax liabilities. Use Check Nos. 401 and 402. (hint: uses 1 line each)
CASH PAYMENTS JOURNAL
Date
PAGE 1
Account Title
Ck.
No.
Post
Ref.
General
Debit
Credit
Accounts
Payable DR
Purchases
Discount CR
Cash
CR
PRACTICE PROBLEM 2: Paying Withholding and Payroll Taxes
A cash payments journal is provided below. The following payroll data is for XYZ Corp. for the monthly pay period ended June 30, 2017.
Date Paid
June 30, 2017
Federal Income Tax Withheld
$1,052.00
Employee Social Security Tax Withheld
$1,004.40
Employee Medicare Tax Withheld
$234.95
Credit balances on June 30 for the unemployment tax accounts for the first quarter are as follows: Unemployment Tax Payable – Federal, $274.80;
Unemployment Tax Payable – State, $1,922.40. XYZ Corp. pays both unemployment taxes each quarter.
1. Prepare a journal entry for payment of the withheld taxes (in the table above). Use Check No. 678. (hint: uses 3 lines)
2. Prepare journal entries for the payment of the federal and state unemployment tax liabilities. Use Check Nos. 711 and 712. (hint: uses 1 line each)
CASH PAYMENTS JOURNAL
Date
PAGE 1
Account Title
Ck.
No.
Post
Ref.
General
Debit
Credit
Accounts
Payable DR
Purchases
Discount CR
Cash
CR