Year-End Accounts Payable & Tax Deductions
Accounts payable is a business account that companies use to keep track of the liabilities they need to pay out to others. A very common use of accounts payable is to account for employee wages and ensure that wages are paid out properly, according to both company and government regulation. The accounts payable category becomes even more important at the end of the year, when calculations are made for taxes and extra deductions.
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Accounts Payable Deductions
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It is important to note that deductions in accounts payable and what people typically think of as tax deductions are not the same thing. When figuring payroll made from accounts payable, a tax deduction is literally wage funds deducted from the paycheck in order to automatically pay employee taxes. This makes it easier to prepare for the year-end accounting, as well as continually meeting government taxation requirements for employees. A large part of the payroll process is devoted to accounting for these deductions.
Withholding Allowances
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For the common type of tax allowances -- the type that leads to tax savings for employees -- accounts payable requires a process known as a withholding allowance. Normal withholdings are made for taxes for all employees, but based on how the employee registers on his W-2 form, the company may include allowances in its withholding process. The number of dependents that an employee has is a common cause of a withholding allowance. This helps the company pay taxes from the proper base and not overpay for some employees, which would necessitate a refund later on.
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Business Taxes
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Businesses also have a variety of taxes that they need to pay themselves. They must match Social Security and Medicare taxes based on what their employees pay, and they must make federal and state unemployment tax payments as well. These payments are also often made from accounts payable; they become very important at year-end accounting because, like employees, employers often qualify for various tax deductions of their own as long as they have properly followed withholding procedures and managed their own tax situation correctly.
Outsourcing
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Withholding taxes, like income taxes, Social Security taxes and various allowances for all employees, can become very complex. As such, many businesses choose not to manage their accounts payable directly. Instead, they outsource accounts payable to an accounting firm, which then manages payroll and sends all necessary tax information to the IRS at year-end accounting. This may incur higher costs for the business, but also improves accuracy and often speed of payroll.
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