Payroll accounting and examples

4. Liabilities for employer payroll taxes

There are three major employer payroll taxes: a) social security and Medicare taxes; b) the federal unemployment insurance tax; and c) the state unemployment insurance tax. Employer payroll taxes are an operating expense.

Employers match the amount of social security and Medicare taxes their employees have to pay. In our second example, Friends Company withheld $178.85 and $ 41.83 (total $220.68) of social security and Medicare taxes for Jim Roberts. Hence, the company would have to pay additional $220.68 to the government (i.e. just for that employee). Once again, we can see that both employees and employers pay FICA tax.

Federal unemployment insurance tax, also called the FUTA tax, is another social security tax, which helps to provide compensation and help to unemployed people. The FUTA tax is levied at flat rate only on employers. Employers are allowed a credit against the FUTA tax for unemployment taxes paid to the state. For instance, in 2009 employers had to pay 6.2% FUTA tax for the first $7,000 of gross earnings of each worker per year. That is, the maximum FUTA tax the employers could have paid in 2009 was $434 ($7,000 x 6.2%). However, employers could have applied certain credits to decrease the effective FUTA tax rate (e.g. 5.4% credit would reduce the FUTA tax rate to 0.8%). For more information, check out IRS website, and in particular, Form 940 and IRS instructions for Form 940.

State unemployment insurance tax, also called the SUTA tax, is a social security tax. The SUTA tax is different in each state: different states might have different limits for credits applied against FUTA tax; some states levy additional taxes on employers (e.g. disability insurance); employers might have to pay different SUTA taxes depending on their industry, experience rating, or taxing jurisdiction.

For instance, let us assume Friends Company, an Indianapolis-based company, manufactures industrial valves. In our second example, Jim Robert's gross earnings were $2,884.62 for the week ended January 23, 2009. The company recorded the following employer payroll tax liabilities:

Account Titles

Debit

Credit

Payroll Tax Expense

399.53

 

      Social Security Tax Payable

 

178.85

      Medicare Tax Payable

 

41.83

      Federal Unemployment Tax Payable

 

23.08

      State Unemployment Tax Payable

 

155.77

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