The only payroll taxes that will appear on the income statement are the ones that the employers must pay: the employers' matching portion of the Social Security and Medicare taxes (FICA) and the federal and state unemployment taxes. (The payroll taxes withheld from employees' wages and salaries are not company expenses.) Employer-paid fringe benefit costs other than payroll taxes (employers' share of health insurance, holiday and vacation pay, retirement contributions, etc.) will also appear on the income statement—however, we will focus on the payroll taxes.

The employer-paid FICA and unemployment taxes should appear as an expense in the same period that the employees' wages and salaries are expensed. The payroll tax expense is part of each employee's compensation and should be matched with the associated revenues if possible, or matched to the period when the wages and salaries occurred.

For example, if a company does not manufacture products, the company-paid payroll taxes are likely to be part of the selling and administrative salary and wage expenses. These will be reported on the income statement in the accounting period when the wages and salaries were earned by the employee.

If the company is a manufacturer of products, the company-paid payroll taxes should be reported along with the respective wages and salaries. Let's assume that a company has $1,000,000 of direct labor; $2,000,000 of indirect manufacturing wages and salaries; and $3,000,000 of selling and administrative salaries. Let's also assume that the employer-paid FICA and unemployment taxes amount to $600,000 of which $120,000 is associated with the direct labor; $200,000 is associated with the indirect manufacturing wages and salaries; and $280,000 is associated with selling and administrative salaries. The $280,000 of payroll taxes pertaining to the selling and administration functions will appear on the income statement of the accounting period in which those employees earned the salaries (and the company incurred the expense). The $320,000 of employer-paid payroll taxes for employees working in the manufacturing activities of the company will be assigned to the products. When the products are sold, the assigned costs will appear on the income statement as part of the Cost of Goods Sold. If the products are not sold, these costs will be included as part of the products' cost that are reported as Inventory on the balance sheet.

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