Withholding and payroll taxes

Businesses are required to withhold taxes from employees' earnings and to pay taxes based on wages and salaries paid to employees. These withholding and payroll taxes are liabilities until they are paid to the taxing authority. Note that there are really two sources for these taxes. First, you are well aware that employees must pay certain taxes that are ‘‘withheld'' from their paycheck. This is the difference between your gross pay and your net pay. The business does not have any rights to this money; instead, as with sales tax, they must pay these amounts to the proper authority. The standard withholding s are federal, state, and possibly city or county income taxes, as well as Social Security and Medicare. Employees may also have amounts withheld for such things as retirement accounts, parking, and health insurance, among other things, but these are not taxes.

Employers also pay federal and state unemployment taxes (these are used to fund unemployment benefits) based on their history of firing employees (because fired employees are eligible to collect unemployment benefits). Finally, employers do have other costs—typically called fringe benefits—associated with employees, but these are not taxes. Examples of fringe benefits include employer contributions to retirement accounts and health insurance. Most U.S. businesses have the following obligations to pay taxes or withhold them from employee earnings. Unearned revenue is the liability created when customers pay for goods or services in advance.Additionally, the business itself must pay certain taxes based on employee payrolls. You may be less aware of some of these taxes, but the dollar amounts are very real to any business. These amounts are not withheld from employee pay; rather they are additional amounts that must be paid over and above gross pay. For example, employers match your contribution to Social Security and Medicare (together these are called FICA). That is, if you have $400 withheld from your paycheck for Social Security, your employer pays the federal government $800 related to your employment.

In such instances, the seller has a liability to the purchaser in the amount of the prepayment. This liability is discharged either by providing the goods or services purchased (at which time revenue is recognized) or by refunding the amount of the prepayment. A contingency is defined as an ‘‘. . . existing situation, or set of circumstances involving uncertainty as to a possible gain or loss that will be resolved when a future event occurs or fails to occur.'' A contingent liability (or, contingent loss) results when there is uncertainty about a possible loss. For example, a firm may be contingently liable for damages under a lawsuit that has yet to be decided by the courts. When the courts reach a decision, the liability will be known, but until then it is contingent on that decision.