The restaurant example shows a $3,000 wage expense and a $3,000 wage liability balance from March 31. Meanwhile, the accrual method posts payroll liabilities and expenses in the same period. ![]() So March revenue matches March expenses, including the $3,000 payroll costs. The expense posts in March, when employees worked those hours. When the business owner processes payroll on April 5, cash decreases by $3,000, and wages payable decrease by $3,000. Using the accrual method, the $3,000 wage expense posts on March 31, along with a $3,000 increase in wages payable. This accounting method does not post expenses based on cash outflows.Īssume that a restaurant owes workers $3,000 in payroll for the last five days of March and that the next payroll date is April 5. The matching concept presents a more accurate picture of company profit. The accrual method records payroll expenses in the month that you incur them, regardless of when you pay for the expenses. Because of this, every business should use the accrual method of accounting, which matches the revenue it earns with the expenses it incurs. Payroll expenses are incurred on the day that the employee works, therefore earning their pay. If you have a lot of control over a worker, you should classify them as an employee. The guidelines consider how much control you have over what the worker does, who provides tools and supplies, and if you have a written contract. The control you have over a worker determines if the worker is an employee or an independent contractor. ![]() The IRS explains how to assign workers to a particular category. The company’s only expense is the gross amount you pay for services. Independent contractors, on the other hand, are responsible for all tax withholdings. If the worker is an employee, you’ll incur the cost of payroll discussed above. employees: What’s the differenceĪ worker’s classification determines how you treat them for tax purposes. Generally, the only payroll cost for an independent contractor or freelancer is the dollar amount you pay for services. Your share of the costs is a payroll expense. Health care coverage (health insurance, dental, vision, etc.)įor example, you may withhold amounts for the employee’s share of insurance premiums or their retirement contributions.Some of the most common employee benefits include: If your company offers benefits, you may withhold a portion of the costs from a worker’s pay. Total federal and state unemployment taxes vary and depend on each state’s unemployment program. If wages are subject to a state unemployment tax, the employer can use a 5.4% FUTA credit, which reduces the FUTA tax to 0.6%. The current employer’s FUTA tax rate is 6% on the first $7,000 in gross income a worker earns. The Federal Unemployment Tax Act ( FUTA ) and the State Unemployment Tax Act ( SUTA ) provide temporary income for workers who lose employment. Unemployment tax (FUTA and SUTA) withholdings Each worker pays the same 7.65% tax through payroll withholdings. Currently, employers pay a 6.2% Social Security tax and a 1.45% Medicare tax (7.65% in total). Deductions for FICA taxesįICA taxes fund Medicare and Social Security. Pass what you withhold to each taxing authority. ![]() The worker’s annual income and the number of allowances they specify on their W-4 determine the amount you deduct. You must deduct federal-and possibly local and state payroll taxes-income taxes from wages. Deductions for state and federal income tax withholdings The gross wages you pay employees may be your largest payroll expense. Gross wagesĬalculate gross wages from an annual salary or hourly pay rate and hours worked. To understand these differences, review each type of payroll expense and determine if the component is a business expense. Processing payroll requires collecting and managing data, and your payroll expenses may change frequently.Īmounts you withhold from a worker’s pay and submit to a third party are not company expenses. To pay workers, start with gross pay and deduct withholdings to calculate net pay. Payroll expenses are what employers pay to hire workers.
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