Payroll liabilities in the books

Pop Books keeps a payroll ledger (see payroll-ledger) but does not calculate withholding, make deposits or file payroll forms. Your payroll provider or accountant does those. This article explains how the amounts should sit in your books, so your accountant or payroll provider can check them.

Where the money sits

• Wages paid are an expense.
• Tax withheld from employees is a liability until you deposit it. It is never an expense.
• Employer share of payroll taxes is an expense when you incur it.
• Each type of withholding should have its own liability account, so the balance shows what you still owe.

Deposits

1. Pay the deposit from the bank account.
2. Record it against the liability account, so the balance drops to what you still owe.
3. Keep the deposit confirmation.

Deposit schedules (monthly or semi-weekly) depend on how much you withhold. Check IRS Publication 15 each year for the rates, wage limits and deposit rules.

Forms

• Form 941, each quarter, for federal income tax withheld and employment taxes.
• Form 940, once a year, for federal unemployment tax.
• Forms W-2 and W-3, to employees and the Social Security Administration, usually by January 31.
• Some small employers file Form 944 once a year instead of Form 941. Ask your accountant which applies.

Year-end check

• Liability balances should be close to zero after the last deposit of the year.
• Any balance left is money you still owe. Check it before you close the year.
• Keep payroll records for at least four years. Your company's retention setting may be longer (see record-retention).