Salaries & Wages: Consider the Employer's SS & Medicare Contributions
Inasmuch as December salaries and wages will be paid at month's end, the corresponding taxes, Social Security, and Medicare contributions have been withheld from salaries and are recognized as payables. They will be remitted on January of the following year.
The bookkeeper’s concern will be the recognition of the employer’s correlated contribution, which should be taken up before the closing of the books at year's end and not in the following month when actual remittance is made.
Leaving this unrecognized as expense for the year, particularly if the company has substantial payroll amounts, may result in under-deduction of expenses against income. The IRS may ignore this because the business is bound to pay higher taxes, but the SEC may not, because this is an overstatement of income.
Hence the following accrual entries should be included among the adjusting entries in the post-closing trial balance worksheet.
Dr. Social Security-Employer’s Contribution (Dec.) __________ $xyz
Dr. Medicare-Employer’s Contributions (Dec.) __________ $xyz
Cr. Social Security-Employer’s Contributions Payable __________ $xyz
Cr. Medicare-Employer’s Contributions Payable __________ $xyz
Come January, and upon actual payment of all Social Security and Medicare contributions recognized in the December payroll, the accounting entry will include the reversal of the accrual account Employer’s Contributions Payable for Social Security and Medicare. The accrued expenses adjusting entries entered before the books were closed in December already recognized the expenses in order to match income for the year.