If you own a business, you must periodically build a balance sheet for tax purposes. A balance sheet also gives you an indication of your company's financial health. If you hire employees, their wages will make up part of the balance sheet. To record wages, you should first list the components of employee salary in the form of a general ledger. Social security tax is one of these components.
Payroll Clearing Accounts and Balance Sheets
A balance sheet is a document used by a manager to assess the financial health of a the company. Companies prepare balance sheets using generally accepted accounting principles — GAAP. For this reason, they often hire the services of a qualified accountant. There are two main sections of a balance sheet: assets and liabilities. Assets are everything the company owns, and liabilities are everything the company owes to others. The components that make up an employee's wages, such as social security, appear on the payroll clearing accounts section of a balance sheet, which is found in the assets section.
Social Security Tax
Social Security is a form of insurance organized by the government. In exchange for taxes from the work force, the government offers benefits to those who become disabled and have not yet reached retirement age, as well as to those of retirement age. It is the employer's responsibility to compile a general ledger for both employee and employer taxes. The employer records Social Security taxes, collected through the FICA tax mechanism, for the employee tax ledger. In 2011, the FICA tax rate was 7.65 percent of gross earnings, with maximum Social Security contributions of $6,621.60 for employers and $4,485.60 for employees.
Recording Social Security
Using GAAP standards, payroll clearing accounts typically take the form of a general ledger. A general ledger comprises of three columns. The first column lists the name of an item. If the item is a debit transaction, the debit amount appears in the second column. If it is a credit transaction, it appears in the third column. When composing a general ledger for employee taxes, the employer will list the employees wage in terms of a debit. For credits, the employer lists both federal and state taxes. State taxes include state income tax and state disability insurance. Federal taxes include federal income tax, medicare tax and social security.
Consider an employee with a monthly salary of $5,000. An accountant lists this $5,000 in the debit column of the general ledger. Every month, the employee pays a total of $1,682.50 in federal income taxes, FICA tax and Medicare tax. These taxes appear in the credit section of the general ledger. Furthermore, the employee pays $240 in state taxes, which also appear in the credit column. Subtracting all federal and state taxes from the employees gross monthly salary of $5,000 gives a net monthly salary of $3,077.50. The accountant records this final figure as "payroll clearing" in the credit column of the general ledger.
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