1) Employee withholdings vs. employer payroll taxes (who pays what)
In payroll accounting, it helps to separate two ideas that often get mixed together:
- Employee withholdings: amounts taken from the employee’s gross pay and withheld by the employer (for example, employee portions of social insurance taxes, income tax withholding, and any employee-paid deductions). These reduce the employee’s paycheck.
- Employer payroll taxes: amounts the employer pays in addition to gross pay. These do not reduce the employee’s net pay, but they increase the employer’s total payroll expense.
Think of it as two parallel cash flows: (a) money withheld from the employee and remitted on the employee’s behalf, and (b) extra employer-paid amounts triggered by having employees on payroll.
How this shows up in accounting
- Employee withholdings create liabilities (amounts owed to tax agencies/benefit providers) and reduce cash paid to the employee.
- Employer payroll taxes and employer-paid benefits create additional expenses and additional liabilities (until paid).
2) Common employer-side cost categories
A) Employer social insurance taxes (concept)
Many jurisdictions require employers to pay a separate employer portion of social insurance programs (often paired with an employee portion). Conceptually:
- They are calculated as a percentage of taxable wages (sometimes with wage bases/caps).
- They are recorded as employer payroll tax expense and a corresponding payroll tax payable liability until remitted.
- They do not change the employee’s net pay because they are not withheld from the employee.
Examples of programs that often have an employer portion include retirement/social security-type programs and employer-paid health insurance taxes in some systems.
B) Unemployment taxes (concept)
Unemployment insurance is commonly funded partly or entirely by employer-paid taxes. Key conceptual points:
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- Typically employer-only (no employee withholding in many systems).
- Often has a wage base (tax applies only up to a certain amount of wages per employee per year).
- Rates may vary by employer experience, industry, or jurisdiction.
Accounting treatment is similar: expense when wages are incurred, liability until paid.
C) Employer-paid benefits (concept)
Employer-paid benefits are compensation costs that are not part of the employee’s gross pay in the paycheck calculation but are still part of the employer’s cost of employing someone. Common categories:
- Health, dental, vision insurance (employer premium portion)
- Employer retirement contributions (e.g., employer match or fixed contribution)
- Employer-paid life/disability insurance
- Employer-paid paid time off accruals (depending on policy and accounting approach)
Some benefits are paid to third-party providers (insurers, retirement plan administrators) rather than to the employee. The cost is still compensation-related and increases total payroll expense.
D) Workers’ compensation (concept)
Workers’ compensation is typically an employer-paid insurance cost that covers workplace injuries. Conceptually:
- Premiums are often based on payroll amounts, job classifications, and experience ratings.
- Even though it is insurance, it behaves like a payroll-driven employer cost and is frequently tracked alongside employer payroll taxes and benefits for budgeting and job costing.
3) Defining total employer payroll cost
To understand what payroll truly costs the employer, separate the employee’s paycheck amount from the employer’s full cost. A practical formula is:
Total Employer Payroll Cost = Gross Pay + Employer Payroll Taxes + Employer-Paid Benefits
This total cost is what matters for:
- Pricing and service costing (labor burden)
- Department budgets and forecasting
- Comparing employees vs. contractors
- Evaluating benefit plan changes
4) Parallel example: same employee, adding employer costs
Assume an employee has gross pay of $1,000.00 for the pay period. The employee’s withholdings and net pay were calculated elsewhere; here we focus only on employer-side costs that sit on top of gross pay.
Step 1: Identify employer payroll tax rates and benefit amounts for the period
For this example, assume the employer incurs the following additional costs:
- Employer social insurance tax: 6.20% of gross pay
- Employer health insurance premium: $150.00 per pay period
- Unemployment tax: 0.60% of gross pay (assume wages are still within the taxable wage base)
- Workers’ compensation premium: 1.20% of gross pay
Step 2: Calculate each employer-side cost
| Employer cost item | Basis | Rate / Amount | Calculation | Employer cost |
|---|---|---|---|---|
| Employer social insurance tax | Gross pay | 6.20% | $1,000.00 × 0.0620 | $62.00 |
| Unemployment tax | Gross pay (within wage base) | 0.60% | $1,000.00 × 0.0060 | $6.00 |
| Workers’ compensation | Gross pay | 1.20% | $1,000.00 × 0.0120 | $12.00 |
| Employer-paid health insurance | Per pay period premium | Flat amount | Given | $150.00 |
| Total employer-side add-ons | $230.00 |
Step 3: Compute total employer payroll cost for the pay period
Using the formula:
Total Employer Payroll Cost = Gross Pay + Employer Payroll Taxes + Employer-Paid BenefitsHere:
- Gross Pay = $1,000.00
- Employer Payroll Taxes = $62.00 + $6.00 + $12.00 = $80.00
- Employer-Paid Benefits = $150.00
Total Employer Payroll Cost = $1,000.00 + $80.00 + $150.00 = $1,230.00
Step 4: Compare “paycheck amount” vs. “employer total cost”
The employee’s paycheck (net pay) is determined by employee withholdings and deductions, which are separate from the employer add-ons above. The key takeaway is the gap:
- Employee sees: a paycheck based on gross pay minus employee withholdings/deductions.
- Employer experiences: a total labor cost that is often meaningfully higher than gross pay due to employer taxes and benefits.
Step 5: Practical payroll accounting mapping (what gets expensed vs. what becomes payable)
When the payroll is recorded for the period, employer-side items typically create:
- Additional expenses: employer payroll tax expense, benefits expense (and sometimes insurance expense depending on setup).
- Additional liabilities: payroll taxes payable (by type), benefits payable or insurance premiums payable (until paid to the provider).
A simplified view of the employer-side portion (separate from the employee paycheck entry) might be tracked like this:
| Category | Typical expense account | Typical payable account |
|---|---|---|
| Employer social insurance tax | Payroll Tax Expense | Social Insurance Tax Payable (Employer) |
| Unemployment tax | Payroll Tax Expense | Unemployment Tax Payable |
| Workers’ compensation | Workers’ Comp Expense (or Payroll Tax/Insurance Expense) | Workers’ Comp Payable (or Insurance Payable) |
| Employer health insurance | Employee Benefits Expense | Health Insurance Payable (or Benefits Payable) |
