Ah, payroll taxes. They seem so straightforward, yet they’re anything but. Even some of the most seasoned accounting pros have to pull out the good ‘ole T-account scratch paper to help make sense of what is going on! If payroll taxes confuse you, know that you are not alone.
For simplicity’s sake, I’m only going to attempt to tackle the most common federal taxes, also known as Social Security, Medicare, and Withholding (which are reported on your Form 941/944). Know that each state has their own taxes that may or may not be handled in the same ways as I describe below. Also note that another federal tax, Unemployment (Form 940), is not included in this infographic as it is an annual tax paid only by employers (read: doesn’t get withheld from employee paychecks).
So, what have we learned? In the example above, Robert gets paid a gross amount of $3,000.00 but the check he receives is the net (after taxes are withheld) amount of $2,483.12. It becomes John T. Owner’s responsibility to set Robert’s taxes aside to be sent to the IRS on the schedule set for his company. Robert’s taxes are comprised of contributions to Social Security, Medicare and Federal Withholding (which is determined by Robert’s Form W-4 he filled out when he was hired).
When it comes time to send those taxes in, John T. Owner adds a matching Social Security & Medicare payment (which he gets to write off) to Robert’s portion (which he does NOT get to write off). That is how we arrive at a total owed to the IRS of $746.38.
The Balance Sheet (specifically the liabilities section) houses any money we are holding in trust for someone else (like the IRS). The Profit & Loss Statement is where we get to show how much our company contributed to payroll taxes.
And for all of my bookkeeping brethren who feel their blood pressure rise when booking these crazy taxes, feel free to adapt this T-Account for your needs.
Booking a Paycheck:
Making a tax payment to the IRS:
Payroll is one of those very tricky parts of running a business. If you don’t already have a professional processing your payroll, you should. There are many cost-effective and knowledgeable companies in the marketplace to take the liability off of your shoulders. Don’t chance late fees, interest, and penalties to save a few bucks in the short-term. Payroll is best left to the pros.