Which statement best describes how payroll transactions are recorded, including employer payroll taxes?

• A. Wages Expense; withholdings as liabilities; employer payroll taxes as a separate expense and liabilities; pay cash for net wages
• B. Wages Expense; withholdings as revenues; employer payroll taxes recorded as a liability only
• C. Wages Expense; withholdings as assets; employer payroll taxes as a separate asset
• D. Wages Revenue; withholdings as liabilities; employer payroll taxes as a liability only

Answer: (A)

Payroll transactions focus on the cost of labor and the obligations to others. When employees earn wages, you record Wages Expense for the gross pay. The amounts taken from employees for things like income tax and FICA are not revenues or assets; they are obligations the company must remit to the government, so they are recorded as liabilities (withholdings payable). The employer also incurs its own payroll tax costs, such as the employer portion of FICA and unemployment taxes. These are expenses for the business and create separate liabilities that will be paid to the authorities. When you actually disburse pay, you cash out the net wages (gross wages minus withholdings), and you settle the various liabilities.

This matches the described approach: wages expense is recognized, withholdings are liabilities, employer payroll taxes are a separate expense and liability, and cash is paid for net wages. Alternatives misclassify these items (for example, treating withholdings as revenues or assets, or recording wages as revenue), which conflicts with how payroll costs and obligations truly work.