The following is to explain the appropriate entries for employee payroll and payments for withholding taxes. Please note that the account names used may be slightly different in your system. If account types or signs differ, discuss these difference with your accountant.
The accounts you will need at a minimum are shown below. If you have local taxes or other witholding necessary, you may need more accounts.
| TYPE | SIGN | TITLE | ||
| P | + | Payroll Expense | ||
| B | - | Federal Witholding Liability | ||
| B | - | State Witholding Liability | ||
| B | - | FICA Liability | ||
| P | + | Employer FICA Portion Expense |
The following is the entry for a typical payroll "invoice". We assume the following numbers:
| Gross Pay | $1000.00 | |
| Federal Witholding | $200.00 | |
| FICA Witholding | $70.00 | |
| State Witholding | $120.00 | |
| ----------- | ||
| Net Pay | $610.00 |
Note that there is no claim that these numbers are correct. The percentages used were picked just to make the numbers easy to work with.
| Invoice Total | $610.00 |
Distribution:
| Payroll Expense | $ 1000.00 | |
| Federal Witholding | $ -200.00 | |
| FICA Witholding | $ -70.00 | |
| State Witholding | $ -120.00 |
Note that the total of the details balances with the invoice total.
The various witholding liability accounts will have credit balances which reflect the fact that payments have not yet been made to the various government agencies involved.
It is also necessary to make a manual journal entry to reflect the employer's portion of FICA. This should be in the form of a CREDIT to the FICA liability account and a DEBIT to the employer portion FICA expense account. One entry with the total for the pay period should be sufficient.
When it is time to make the tax deposits, enter the invoices for each payment into Accounts Payable. In each case, the expense distribution will go to the appropriate witholding liability account. Since the distribution is always a DEBIT, this should reduce the liability.
The net result of all of this is that your liability accounts should be zero when you have made all necessary tax payments. The two expense accounts (Payroll and Employer's Portion) will show the total of payroll expense.
Note that if there are other taxes in your area that involve both employee and employer contributions you may need to set up other accounts similar to the FICA account.