How to Test Employee Payroll Taxes

By Maire Loughran from Auditing For Dummies

One way auditors test employee payroll-related items is to make sure the related employer expenses are properly accounted for on the books. It’s the auditor’s responsibility during the audit to sample and test employer payroll taxes, accrued employer payroll taxes, and employer benefit expenses to make sure the income statement and balance sheet are materially correct.

After a company runs payroll, it records tax and other deductions made from the employees’ checks as short-term liabilities until the company remits those amounts to the proper agency. The employer has a payroll tax expense based on the employees’ gross wages. These items are recorded as short-term liabilities as well:

FICA: The employer is obligated to match each employee’s contribution dollar for dollar.
State Unemployment Tax Act (SUTA): This tax percentage varies based on employers’ unemployment claim experience, as well as each state’s rates. The tax is assessed on the first $7,000 of wages each year.
Federal Unemployment Tax Act (FUTA): The employer pays FUTA tax at 6.2 percent of the first $7,000 of wages each year. In times of catastrophic unemployment, FUTA kicks in to pay unemployment claims after SUTA is exhausted. Employers in good standing with their state (they’re current with all state tax obligations) can claim an offset credit against FUTA, which can reduce FUTA to .8%.
Employer benefits: Additionally, the employer has an expense for the company portion of healthcare, 401(k) match, and any other benefit programs provided by the company.

The federal withholding tax and FICA tax the company withholds from each employee’s check is known as the trust fund portion of the payroll deposits. The trust fund is not an expense to the employer, nor is it free money for the company to spend as it pleases. This money belongs to the employee from whom the company deducts it.

The IRS assesses extremely high penalties if payroll tax deposits are not made on time. The agency is particularly humorless about the trust fund portion of the tax deposit. Depending on the employer, payroll taxes may be deposited on the 15th day of the month following the pay period or even earlier.