Employee payroll deductions become Question 25 options: 1) expenses to the company. 2) liabilities to the company until paid to third parties. 3) employee benefits expense. 4) paid-time off liabilities.
The Correct Answer and Explanation is:
The correct answer is:
2) liabilities to the company until paid to third parties.
Explanation:
Employee payroll deductions are amounts that an employer withholds from an employee’s paycheck, typically for reasons like taxes, benefits, retirement contributions, and insurance premiums. These deductions are not considered company expenses, but rather liabilities. Here’s why:
- Nature of Deductions: The deductions are amounts the company holds temporarily before remitting them to third parties. For example, taxes withheld from employees’ wages must be paid to the government, and contributions to retirement plans are forwarded to a pension fund or retirement savings account. Since the company is holding these amounts temporarily and is obligated to transfer them to the respective parties, these amounts are classified as liabilities until the payment is made.
- Not Company Expenses: Payroll deductions are not considered an expense to the company because they are not the company’s costs; instead, they are amounts taken from the employees’ wages. An expense would reflect an actual cost incurred by the company in conducting its operations, such as wages paid to employees, office supplies, or utilities. Deductions, however, are funds the company is merely collecting on behalf of others.
- Impact on Financial Statements: On the company’s balance sheet, payroll deductions are recorded as liabilities. The liability will be settled once the company remits the deducted amounts to the appropriate third parties (e.g., tax authorities, insurance providers). Until that time, the company must recognize the amount as a liability.
In summary, payroll deductions become liabilities for the company because it holds the deducted amounts until they are paid to the relevant third parties, and it’s not an expense on the company’s books.
