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:
Payroll deductions are amounts withheld from an employee’s paycheck for various purposes such as taxes, retirement contributions, insurance premiums, union dues, and other benefits. These deductions are not considered expenses to the company but are amounts the company is obligated to pass on to third parties (like tax authorities, insurance companies, and pension fund managers) on behalf of the employee.
Here’s why option 2 is correct:
- Liabilities to the company until paid to third parties:
When payroll deductions are made, the company holds these funds temporarily. The company has a responsibility to remit these amounts to the appropriate third parties. Until this payment is made, the deductions are considered liabilities because the company owes the money to external entities. For example, if a company withholds income tax, that amount is owed to the government until the company remits it. - Expenses to the company:
While the company does pay expenses related to payroll (e.g., employer’s portion of Social Security, insurance, etc.), payroll deductions themselves are not expenses. They are amounts withheld from employee earnings, with the company acting as an intermediary. - Employee benefits expense:
Employee benefits expense refers to the employer’s contribution to benefits like health insurance, pensions, and other benefits that are paid for by the company, not deducted from the employee’s salary. - Paid-time off liabilities:
Paid-time off (PTO) liabilities refer to the amount the company owes employees for unused leave, which is not related to payroll deductions.
In summary, payroll deductions are liabilities because the company is holding the money temporarily before sending it to the appropriate third parties. These are not company expenses, employee benefits, or paid-time off liabilities.
