Do Accrued Payroll Taxes Have a Normal Debit or Credit Balance?
Accountants accrue payroll taxes at the end of every accounting period. Accrued payroll taxes apply to payroll taxes that the company will pay based on the accrued salaries for the period. Accruing these expenses allows the company to present a more accurate and fairer financial picture for the period being reported.
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Accrued Salaries
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Most companies report their financial results at the end of each accounting period. The company pays its employees at regular intervals that usually don't coincide with the end of the accounting period. As employees continue to work, they earn wages. When the last day of the accounting period rolls around, the employees have earned wages, even though they haven't received payment of those wages. The company recognizes these wages due to employees through an adjusting entry. The entry includes a debit to Wages Expense and a credit to Wages Payable. Wages Expense, an expense account, maintains a normal debit balance. Wages Payable, a liability account, maintains a normal credit balance.
Types of Payroll Taxes
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Employers pay payroll taxes on the wages they pay to employees. Payroll taxes include Social Security tax, Medicare tax, Federal Unemployment tax and State Unemployment tax. The company calculates these taxes based on the individual rates, the maximum wages limits applicable to each tax and the wages earned for the period.
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Accruing Payroll Taxes
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When the company records the accrued salaries for the end of the period, it also needs to record the applicable payroll taxes. Rather than accrue each payroll tax individually, the company uses one account to record accrued payroll taxes and includes the total amount of payroll tax that applies to the accrued salaries. The company recognizes the accrued payroll taxes through an adjusting entry. The entry includes a debit to Accrued Payroll Tax Expense, an expense account, and a credit to Payroll Tax Payable, a liability account. Accrued Payroll Tax Expense, an expense account, maintains a normal debit balance. Payroll Tax Payable, a liability account, maintains a normal credit balance.
Reversing Accrued Salaries and Accrued Payroll Taxes
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On the first day of the following accounting period, the company reverses the adjusting entries it made for accrued salaries and accrued payroll taxes. This allows the company to record the next payroll following its normal procedure, rather than making an adjustment for the partial wages and payroll taxes recognized through the adjusting entries.
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