The journal entry to record employer payroll taxes affects

The journal entry to record employer payroll taxes affects:

assets only.
liabilities only.
liabilities and stockholders’ equity.
assets and liabilities.

The correct answer and explanation is :

The correct answer is:

Liabilities and stockholders’ equity.

Explanation:

When an employer records payroll taxes, it is recognizing additional liabilities owed to various government agencies. Payroll taxes typically include Social Security taxes (FICA), Medicare taxes, federal and state unemployment taxes (FUTA and SUTA), and other applicable employer payroll obligations. These taxes are employer-paid expenses and are recorded as liabilities until they are remitted to the government.

Here’s how the employer records payroll taxes in the journal entry:

Journal Entry to Record Employer Payroll Taxes:

   Payroll Tax Expense             XX   
       Social Security Payable     XX   
       Medicare Tax Payable        XX   
       FUTA Payable                XX   
       SUTA Payable                XX   

Breakdown of the Journal Entry:

1. Payroll Tax Expense (Debited) – This represents an expense for the employer, which reduces net income and, ultimately, stockholders’ equity.
2. Liabilities (Credited) – The employer’s portion of payroll taxes creates obligations that need to be paid to the government, increasing liabilities.

Impact on the Accounting Equation:

• Liabilities Increase: The company owes payroll taxes to the government.
• Stockholders’ Equity Decreases: Payroll tax expense reduces net income, which in turn decreases retained earnings.

Why Not Assets?

Payroll tax expenses do not impact assets directly. They do not increase or decrease cash or other company resources immediately but rather create an obligation (liability) to be settled later.

Conclusion

The journal entry for employer payroll taxes affects both liabilities (increasing due to tax obligations) and stockholders’ equity (decreasing due to payroll tax expense).