Definition of Payroll Taxes
Payroll taxes are based on the wages (salaries, commissions, bonuses, etc.) of a company's employees and on a self-employed individual's earnings.
Payroll taxes can be divided into three groups depending on who pays them:
- Payroll taxes paid solely by the employer/company
- Payroll taxes that are both withheld from employees' gross wages and matched by the employer/company
- Payroll taxes that are entirely withheld from employees' gross wages
However, only the payroll taxes paid by the employer/company will be reported as expenses on the company's income statement.
Examples of Payroll Taxes Reported on the Income Statement
Examples of the payroll taxes paid by the employer/company and therefore reported as expenses on the company's income statement include the following:
- Payroll taxes that are paid solely by the employer company: federal unemployment taxes (FUTA) and state unemployment taxes
- The employer/company's portion (the matching portion) of the following payroll taxes: Social Security and Medicare payroll taxes (other than the Additional Medicare Tax)
[Employer-paid fringe benefit costs other than payroll taxes (employers' share of health insurance, holiday and vacation pay, company contributions to retirement plans, etc.) will also appear on the income statement.]
The company's payroll tax expense should be reported in the same accounting period that the employees' wages and salaries are expensed.
In the case of a manufacturer, the payroll tax expense will cling to the products along with the gross wages. Therefore, if the goods manufactured are in inventory, the wages and the related payroll taxes and fringe benefit costs will also be in inventory until the goods are sold.