Payroll Taxes

[Keith A. Milner]

On Thursday 10 January 2008 11:43:24 Derrick Hudson wrote:
> On Sat, Jan 05, 2008 at 09:07:42AM -0500, Matt Burkhardt wrote:
> | I'm using gnucash for a small business and now I'm trying to figure out
> | a better way to handle payroll withholding taxes.  Right now, I have
> | Liability / Accounts Payable / Taxes / Federal / Employer and Employee
> | accounts - that works out pretty well for me to pay the tax man each
> | quarter.  I expense the Employer tax contributions so it's pretty simple
> | to see what is paid out from the company's perspective.  However, I'm
> | having problems on how to deal with the employee withholding taxes.
> |
> | I can't expense them - since they're not an expense to the company.  The
> | liability goes down to $0 after I pay off each quarter.
>
> This is correct.

I would query this.

Who pays these taxes? I know they are withheld from the employee's salary, but 
ultimately the combination of employee's salary and any withholdings is, 
surely, an expense to the business. The fact that the liability gos to zero 
when the contributions are paid doesn't mean it's not an expense. Surely the 
same happens with every bill you have (unless you don't pay you bills).

>
> | How would I enter it so that I could just run a report out of
> | gnucash to get the employee withholding amounts?
>
> One option would be to see if half of the Cash Flow report gives you
> what you want.  All of the credits to Liability/.../Employee is the
> amount withheld.  Just ignore the debits half of the report.
>
> Another option would be to add a sub-account under "Salaries Expense"
> for "Employees' Taxes Withheld".  Then when you record the payroll,
> you can note the tax withholding separately.  The total (including the
> sub-account) of Salaries Expense would show your company's actual
> expense, and the sub-account would show your employees' expense.

This is pretty much what I do. My approach (which is based around UK payroll, 
but I can't see any major difference) is to treat the withholdings and the 
net salary both as expenses. Each salary period these both get posted to 
Accounts Payable (because they are owing). Then there's a transfer from the 
Bank Account to Accounts Payable to mirror the net salary payment to the 
employee.

When the whitholding is due, there's another payment from the bank account to 
the IRS (or whoever) to reflect this payment.

I made another posting recently "Payroll (UK specific)" which describes how to 
use a scheduled transaction to make this easier.

In my case I'm using an account tree which is:
Expenses
 |- Emoluments
     |- Employee1
         |- Net Salary
         |- Withholdings
     |- Employee2
         |- Net Salary
         |- Withholdings
etc.

It may be better (and I am considering changing my account tree to this) to 
have:
Expenses
 |- Emoluments
    |- Net Salaries
       |- Employee1
       |- Employee2
    |- Withholdings
       |- Employee1
       |- Employee2

This would give you the ability to see the total Withholdings for a period in 
the account tree. It's also possible there's some good reports that can be 
derived from this.

Cheers,

-- 
Keith A. Milner