Payroll Liabilities
A third type of current liability is the payroll liability. In accounting, the term payroll
refers to the amount paid to employees for the services they provide during a period.
A business’s payroll is usually significant for several reasons. First, the payroll and
related payroll taxes have a significant effect on net
income. Second, the payroll is subject to various fed-
eral and state regulations. Finally, the payroll usually
has a significant effect on employee morale.Recording Payroll. Employee salaries and wages
are expenses to an employer. The total earnings of an
employee for a payroll period, including bonuses and
overtime pay, are called gross pay. From this amount,
one or more deductionsare subtracted to arrive at the
net pay. Net payis the amount the employer must
pay the employee. The deductions for federal taxes
are usually the largest deduction. Deductions may
also be required for state or local income taxes. Other
deductions may be made for FICA, medical insur-
ance, contributions to pensions, and items authorized
by individual employees.
Most of us have Federal Insurance Contributions Act (FICA) tax withheld from our
payroll checks. Employers are required to withhold a portion of the earnings of each
employee. The amount of FICA taxwithheld is the employee’s contribution to two fed-
eral programs: Social Security and Medicare. The FICA tax rate and the amounts sub-
ject to the tax are established annually by law.^3
To illustrate recording payroll, assume that McDermott Co. had a gross payroll of
$13,800 for the week ending April 11. Assume that the FICA tax was 7.5% of the gross
payroll, and that federal and state withholding was $1,655 and $280, respectively. The
McDermott Co. payroll is recorded below.444 Chapter 10 Liabilities
Apr. 11 Wage and Salary Expense 13,800
FICA Tax Payable ($13,800 0.075) 1,035
Employees Federal Income Tax Payable 1,655
Employees State Income Tax Payable 280
Cash 10,830The FICA, federal, and state taxes withheld from the employees’ earnings are not
expenses to the employer. Rather, these amounts are withheld on behalf of employees.Liability for Employer Payroll Taxes. In addition to amounts withheld on behalf
of employees, most employers are also subject to federal and state payroll taxes based
on the amount paid to their employees. Such taxes are an operating expense of the
business. Exhibit 2 summarizes the responsibility for employee and employer payroll
taxes.3 The Social Security portion of the FICA tax is limited to a specified amount of annual compensation
for each individual. The 2005 limitation is $90,000. The Medicare portion is not subject to a limitation.
Throughout this text, we will simplify by assuming that all compensation is within the Social Security
limitation. Under this assumption, the Social Security and Medicare tax rates can be combined into a
single tax rate, termed FICA tax.© 2000–2005 PAYCYCLE, INC. ALL RIGHTS RESERVED.SCF BS IS
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