How to Account for Accrued Payroll Taxes
Understand the accounting process for accrued payroll taxes, from recording the initial liability to clearing the balance sheet with a final payment.
Accrued payroll taxes are the tax expenses a business has incurred related to employee compensation but has not yet remitted to government agencies. Under the accrual basis of accounting, these costs are recognized when the employee earns their wages, not when the taxes are actually paid. This practice ensures that expenses are matched to the period in which they are incurred. These unpaid taxes are recorded as a current liability on the company’s balance sheet, reflecting the obligation owed to federal and state authorities.
Identifying Payroll Tax Components
Employee-Paid Taxes (Withholdings)
A portion of accrued payroll taxes comes from amounts withheld from an employee’s gross pay. These are not an expense to the employer but represent funds the employer collects on behalf of the government. The main withholding is for federal income tax, which varies based on an employee’s earnings and the information on their Form W-4.
The Federal Insurance Contributions Act (FICA) mandates withholdings for Social Security and Medicare. For 2025, the Social Security tax rate is 6.2% of an employee’s wages up to an annual wage base limit of $176,100. The Medicare tax is 1.45% of all employee wages, with no wage cap, and an additional 0.9% is withheld from employee wages exceeding $200,000 in a calendar year.
Employer-Paid Taxes
In addition to withholdings, businesses are responsible for their own share of payroll taxes, which are a direct operating expense. Employers must match their employees’ contributions to Social Security and Medicare. This means the employer pays 6.2% for Social Security on wages up to the annual limit and 1.45% for Medicare on all employee wages.
Employers also pay unemployment taxes. The Federal Unemployment Tax Act (FUTA) imposes a 6.0% tax on the first $7,000 of wages paid to each employee annually. Businesses can often receive a tax credit that reduces the effective FUTA rate to 0.6% if they pay state unemployment taxes on time. State Unemployment Tax Act (SUTA) taxes vary significantly by state.
Calculating and Recording the Payroll Accrual
To illustrate the accounting process, consider a single employee with $1,000 in gross pay for a period who has not yet reached any wage caps. First, the employer and employee portions of FICA taxes are determined.
The employee’s Social Security withholding is $62 ($1,000 x 6.2%), and their Medicare withholding is $14.50 ($1,000 x 1.45%). The employer incurs a matching expense of $62 for Social Security and $14.50 for Medicare. Assuming a federal income tax withholding of $120, a SUTA tax rate of 2.0% on a $10,000 wage base, and a FUTA tax rate of 0.6% on a $7,000 wage base, the liabilities would be $20 and $6, respectively.
A journal entry is then made to record the transaction. The total payroll expense is debited, which includes gross wages plus the employer’s share of taxes, totaling $1,102.50 ($1,000 wages + $76.50 employer FICA + $6 FUTA + $20 SUTA).
Corresponding credits are made to various liability accounts on the balance sheet. Wages Payable is credited for $803.50, representing the net pay the employee will receive. Credits are also made to FICA Taxes Payable ($153), Federal Income Tax Payable ($120), FUTA Payable ($6), and SUTA Payable ($20).
Managing and Paying the Tax Liability
After recording the liabilities, the company must remit the funds to the appropriate government agencies to avoid penalties and interest. The frequency of these payments, known as deposit schedules, depends on the amount of tax liability a company accumulates and can be monthly or semi-weekly for federal taxes.
Paying the taxes requires a journal entry to clear the liability from the company’s books. When the company makes the payment to the IRS, it will debit the liability accounts to decrease their balances. Using the previous example, the entry would include a debit to FICA Taxes Payable for $153, a debit to Federal Income Tax Payable for $120, and a debit to FUTA Payable for $6.
A corresponding credit is made to the Cash account for the total amount paid, in this case, $279. A similar entry would be made for the state tax payment, debiting SUTA Payable for $20 and crediting Cash for $20. These entries zero out the liability accounts, showing the obligation has been satisfied.