Are payroll withholding taxes an expense or a liability?

There are a variety of taxes that a company can withhold from an employee's pay, which include:

• Federal income taxes
• State income taxes
• Employee portion of Medicare tax
• Employee portion of Social Security tax

There are also a variety of withholdings that are not taxes, such child support garnishments. In all of these cases, the company is withholding the taxes (or other items) from employee pay on behalf of the government. This means that the company is liable for paying these withholdings to the government; these payments are not an expense, because the company is merely transferring cash from employees to the government.

There are matching portions of payroll withholding taxes that are both an expense of the company and a liability. Both the Social Security tax and the Medicare tax require matching by the company. Thus, to the extent of the matched amount, a company must debit a payroll tax expense account and credit a liability account.

In all cases, the company eliminates its liability by paying the funds to the government.

Related Topics

Payroll accounting
Payroll entries
Where do payroll taxes appear in the financial statements?