Lesson 38 - Beginner accounting course

38. Employee Benefits and Payroll Taxes

Employee compensation goes beyond just salaries and wages. Many employers offer benefits such as health insurance, retirement plans, and paid leave, while also being responsible for payroll taxes. Understanding these elements is crucial for both businesses and employees to ensure compliance with tax laws and to effectively manage costs.

Employee Benefits: Types and Accounting Treatment

Employee benefits refer to non-wage compensations provided by employers. These can be mandatory (required by law) or voluntary (offered as incentives).

1. Mandatory Employee Benefits (Varies by Country)

Employers must provide certain benefits based on labor laws, including:

• Social Security and Medicare (U.S.) – Employers and employees contribute to retirement and healthcare programs.

• Unemployment Insurance – Employers pay taxes to support unemployed workers.

• Workers' Compensation – Covers medical expenses and lost wages for job-related injuries.

• Paid Leave (e.g., Sick Leave, Parental Leave) – Some countries mandate paid leave for employees.

2. Voluntary Employee Benefits

Many employers offer additional benefits to attract and retain employees:

• Health Insurance – Medical, dental, and vision coverage.

• Retirement Plans – Contributions to pension plans or 401(k) in the U.S.

• Bonuses and Profit Sharing – Performance-based financial rewards.

• Stock Options – Employees receive company shares at discounted rates.

• Education Assistance – Tuition reimbursement or training programs.

Accounting for Employee Benefits

Employee benefits must be recorded as expenses on the company’s financial statements.

These amounts are later paid to the insurance provider or retirement fund.

Payroll Taxes: Employer and Employee Responsibilities

Payroll taxes include both employee withholdings and employer contributions.

1. Employee Payroll Taxes (Withheld from Paycheck)

• Federal and State Income Taxes – Based on income and tax brackets.

• Social Security Tax (6.2%) – Funds retirement benefits.

• Medicare Tax (1.45%) – Supports healthcare for retirees.

2. Employer Payroll Tax Contributions

Employers must match some taxes and pay additional ones:

• Social Security Tax (6.2%) – Employers match what employees contribute.

• Medicare Tax (1.45%) – Employers also match this amount.

• Federal and State Unemployment Tax (FUTA/SUTA) – Employers alone pay these taxes.

Payroll Tax Accounting Entries

When Recording Employee Withholdings

When Recording Employer Payroll Taxes 

Impact on Financial Statements 

Key Takeaways

• Employee benefits include mandatory (e.g., Social Security) and voluntary (e.g., health insurance) perks.

• Payroll taxes include withholdings from employees’ salaries and employer-paid contributions.

• Proper accounting for benefits and payroll taxes is crucial for legal compliance and financial management.