When accruing bonuses, sales commissions, vacations and other forms of employee compensation, is it customary to accrue at the same time the related employer payroll taxes? Often I see the compensation accrued, but not any associated payroll taxes.
Accruing Payroll Taxes
Answers
I've seen companies accrued it and others not accruing it and good arguments supporting both methods.
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What are the arguments AGAINST accruing the tax when the payroll liability is determined?
I agree it is best to accrue the associated payroll taxes.
Some of the arguments that have been presented to me for not doing it are below. I leave it up to you to judge the merits of them.
- Most payroll taxes for the bonus year have already reached their maximum amounts and therefore if the bonus were to be paid before year end there would be little to no payroll taxes on the payroll.
- Have not accrued in the past. Doing so would therefore result in doubling the expense this year.
- The payroll taxes only become legally payable when the payroll is run and that will only be next year, therefore they should not be a liability at the end of this year.
- Accruing the bonus does not create the payroll tax liability much like providing for returns does not reduce our sales tax liability until the returns actually happen.
- Payroll taxes are not material.
- To hard to do.
The materiality question is the only one of the 'reasons' I accept as legitimate.
My payroll program allowed me to pretend to run a payroll of bonuses to capture the numbers and do a ball-park journal entry. That is the only way I could support the year-end results we used to make strategic decisions.
I allocated the payroll and taxes to the various departments, locations, and product groups as normal before calculating bonus for top manager that were based on those results. Otherwise those managers would get higher bonuses than they earned, and the company would be harmed.
But again, it depends on the materiality for your situation.
Do Not understand why this is a question. It should be automatic that when bonuses, commissions, etc are accrued the associated payroll tax is also accrued.
If it is more than $1K per month - I recommend to always accrue the payroll taxes.
Under GAAP you should accrue an expense as soon as the liability is recognized and the amount can be reasonably estimated. Once you have recognized the liability for payment of wages, you have triggered the contingent liability for the associated taxes and can easily estimate the
I have recently accrued for four months of Bonus, in which I also accrued for Employer related taxes. Payment to the bonus was not made till four months from initial accrual date, in which some employees have already capped on certain employer taxes. How should I book the difference of accrual employee tax, and the actual expense incurred.
Please Help!
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The easiest way is to reverse your entire original accrual (bonus & taxes) and then record the bonus payroll and associated taxes. This will be much cleaner for an
Accrue the taxes with the easiest possible mechanism. General rates are useful vs. "precise" calculations are preferable as any "error will be minimal in amount and time.
It is always best to accrue the incremental taxes due to bonuses, but remember there is a bit of judgment involved in identifying these amounts. External auditors will usually give you some leeway in this judgment.
Payroll Taxes no (except Workers Comp, we file and pay ourselves). Bonuses and the like, yes, if they are known.
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