For many business owners, payroll feels like a task to survive rather than a process to manage. But what if you could approach payday with confidence instead of anxiety? Gaining control over your payroll starts with understanding exactly where the money is going. The payroll journal entry is your tool for achieving this clarity. It breaks down every dollar, from gross wages to net pay, creating a transparent record in your books. Learning the proper method of accounting for payroll journal entries empowers you with financial insight. This guide is designed to give you that power, walking you through the essentials for accurate and efficient payroll management.

Key Takeaways

• Break down every paycheck into its core parts: A proper payroll entry separates gross wages (your expense), tax and benefit withholdings (your liabilities), and the final net pay (your cash outflow) to keep your financial records perfectly balanced.
• Prioritize accuracy to protect your business: Small mistakes in payroll, like misclassifying employees or miscalculating taxes, can lead to significant penalties. Staying diligent with your records is the best way to ensure compliance and avoid costly issues.
• Build a reliable payroll system, not just a routine: Use software to automate calculations, create a documented checklist (SOP) for consistency, and schedule regular reviews to catch errors early. A strong system saves time and prevents headaches.

What Is a Payroll Journal Entry?

Think of a payroll journal entry as the official story of your company’s payroll, written in the language of accounting. It’s a detailed record in your general ledger that captures every financial aspect of paying your employees for a specific period. This isn’t just about the final amount that lands in your team’s bank accounts. A proper payroll journal entry documents the entire picture: the total wages employees earned, the money withheld for taxes and benefits, and the payroll taxes your company contributes.

Each time you run payroll, you create a new journal entry. This process translates the complex details of payroll—from gross pay to various deductions—into clear debits and credits that keep your books balanced and accurate. Getting this right is fundamental to sound financial management. It ensures that your financial statements, like the income statement and balance sheet, reflect your true labor costs. While it might sound technical, understanding this process is key to maintaining financial clarity and control in your business. It’s the bedrock of a reliable and transparent bookkeeping system.

Why Accurate Payroll Records Are Crucial

Keeping precise payroll records isn’t just good practice; it’s essential for the health and integrity of your business. Accurate records are your proof of compliance with federal, state, and local tax laws, helping you avoid costly penalties and audits. They provide a clear, factual basis for the financial information you report to agencies like the IRS. Beyond compliance, these records give you a true understanding of your labor costs, one of the most significant expenses for any business. This clarity is vital for smart budgeting, forecasting, and making strategic decisions about growth. Ultimately, meticulous payroll accounting builds a foundation of trust with your employees and financial stakeholders.

The Core Components of Payroll Accounting

Every payroll journal entry is built from a few key components that must be recorded correctly. The starting point is gross wages—the total amount your employees earned before any money is taken out. From there, you account for all deductions, such as federal and state income taxes, Social Security and Medicare contributions (FICA), and employee contributions to benefits like health insurance or retirement plans. Finally, the entry must also include the employer’s share of payroll taxes. These are the expenses your business pays on top of employee wages, like the matching FICA taxes. Together, these components ensure your books are perfectly balanced and provide a complete financial snapshot of your payroll expenses. If managing these details feels overwhelming, our team is here to help you get it right.

The Anatomy of a Payroll Entry

Think of a payroll journal entry as a complete story of an employee’s paycheck. It doesn’t just show their take-home pay; it breaks down every dollar, from what they earned to where the deductions went. Understanding these components is the first step to mastering your payroll accounting. Each entry has four main parts that work together to give you a clear financial picture: the employee’s total earnings, the money withheld for taxes and benefits, the taxes you pay as the employer, and the final amount that lands in your employee’s bank account.

Gross Wages and Salaries

Gross pay is the starting point for every payroll calculation. It’s the total amount of money an employee earns before any deductions are taken out. This figure represents your company’s full labor cost for that employee during a pay period and is recorded as a business expense. Gross pay isn’t just a base salary or hourly rate; it includes everything you’ve agreed to pay your team for their work. This can cover regular wages, overtime, bonuses, commissions, and any other form of compensation. Accurately calculating gross pay is essential because every other part of the payroll entry, from taxes to net pay, depends on this initial number.

Employee Deductions and Withholdings

Once you have the gross pay, the next step is to account for deductions. These are the funds withheld from an employee’s paycheck for taxes and benefits. Think of your company as a temporary holder of this money. You collect it from your employee’s pay and then pass it along to the appropriate government agencies or providers. These withholdings are recorded as liabilities because you owe these funds to someone else. Common deductions include federal and state income taxes, Social Security and Medicare (often called FICA taxes), and voluntary contributions like 401(k) plans or health insurance premiums. Each deduction needs its own line item in your journal entry to ensure everything is tracked correctly.

Employer Payroll Taxes

This is a part of payroll that business owners sometimes overlook. In addition to the taxes withheld from your employees’ pay, you are also responsible for paying your own set of payroll taxes. These are a direct expense to your business and are not taken from employee wages. The most common employer taxes include your matching share of Social Security and Medicare taxes, as well as federal (FUTA) and state (SUTA) unemployment taxes. These taxes fund critical social programs, and paying them accurately and on time is a key part of staying compliant. Recording these expenses correctly ensures your financial statements reflect the true cost of your workforce.

Calculating Net Pay

After all the math is done, you arrive at the net pay. This is the amount your employee actually takes home—the number they see on their paycheck. The formula is simple: Gross Pay minus all employee deductions equals Net Pay. In your accounting records, this transaction is recorded as a credit from your cash account because it’s money leaving your business. Getting this final number right is incredibly important. It not only ensures your employees are paid correctly, which keeps morale high, but it also confirms that your payroll journal entry is balanced and your books are accurate. It’s the final step that brings the entire payroll story to a close for that pay period.

How to Record a Payroll Journal Entry, Step-by-Step

Recording payroll might seem complicated, but it breaks down into a few logical steps. Think of it as telling the financial story of what your employees earned, what was held back, and what they ultimately took home. Following this process ensures your books are accurate and you stay compliant. Let’s walk through exactly how to create a payroll journal entry from start to finish.

Step 1: Record Employee Wages

First, you’ll account for the total gross wages your employees earned during the pay period. This is their full compensation before any taxes or deductions are taken out. You’ll debit this entire amount to a payroll expense account. This entry captures your total wage expense for the period and sets the stage for the deductions that follow. Getting this initial number right is the foundation for an accurate payroll run, as it represents the total cost of your team’s labor before any other factors come into play.

Step 2: Document Tax Withholdings

Next, you need to record all the taxes withheld from your employees’ paychecks. This includes federal and state income taxes, Social Security, and Medicare (collectively known as FICA). These funds don’t belong to your business; you’re simply holding them on behalf of the government. You’ll credit each type of tax to its own liability account (e.g., “Federal Income Tax Payable”). This shows that you owe this money to the respective tax agencies. Careful tracking here is essential for making timely and accurate employment tax payments.

Step 3: Enter Benefit Deductions

After taxes, it’s time to account for any other deductions. This covers employee contributions for things like health insurance, retirement plans (like a 401(k)), or life insurance. Just like with taxes, you’ll credit these amounts to specific liability accounts, such as “Health Insurance Payable” or “401(k) Payable.” This entry signifies that you’ve collected the funds from your employees and have an obligation to pass them along to the benefit providers. Each deduction should have its own clear trail in your journal to ensure every dollar is accounted for correctly.

Step 4: Process Net Pay

Finally, you’ll record the actual payment to your employees. This is the net pay, or “take-home pay,” which is the gross wages minus all taxes and benefit deductions. To do this, you’ll credit your cash account for the total net pay amount, as this is money leaving your business. You will also debit the corresponding liability accounts to clear them out. This final step reflects the cash outflow to your team and confirms that all funds have been correctly allocated. It’s the moment that brings the payroll cycle together, ensuring your books match the bank.

How to Handle Tricky Payroll Scenarios

Payroll would be simple if every employee worked the same hours for the same pay every single week. But that’s rarely the case. Real-world payroll involves variables that can make recording entries feel like a puzzle. Things like overtime, performance bonuses, paid time off, and legally mandated deductions add layers of complexity. Getting these details right isn’t just about accurate bookkeeping—it’s about maintaining legal compliance and keeping your team happy.

Each of these scenarios requires a slightly different approach to ensure your journal entries are correct and your financial statements reflect the true cost of your labor. It’s crucial to understand how to account for these variations to avoid compliance issues and ensure your employees are paid correctly. For example, miscalculating overtime can lead to significant penalties, while mishandling a wage garnishment can have legal consequences. If you find yourself spending too much time untangling these payroll knots, it might be a sign that you could use an expert eye. Our team is always here to help you gain financial clarity; you can always book a free consultation to see how we can support your business. Let’s walk through how to handle some of the most common tricky situations.

Overtime and Premium Pay

When an employee works more than the standard 40-hour week, they are often entitled to overtime pay. This isn’t just extra hours at their regular rate; it’s premium pay. To record it correctly, you need to calculate the total gross pay, which includes both regular and overtime hours. The overtime pay is typically calculated at a higher rate, often 1.5 times the regular hourly rate. Your journal entry will debit the total amount to your Wages Expense account. This ensures you’re accurately capturing the full cost of labor for that pay period. Getting this calculation right is a key part of choosing the best payroll software for your business.

Bonuses and Commissions

Bonuses and commissions are fantastic for motivating your team, but they require careful handling in your payroll records. These payments are considered supplemental wages and are part of an employee’s gross pay. When you issue a bonus, you will debit the Salaries Expense account for the full amount. Just like regular wages, these payments are subject to payroll taxes. You’ll need to credit the appropriate liability accounts for any taxes withheld before you calculate the final net pay. Having robust payroll software features can make managing these variable payments much simpler, ensuring accuracy every time.

Paid Time Off and Benefits

How you account for paid time off (PTO) might surprise you. The best practice is to record the expense when an employee earns the time off, not when they actually take it. This accounting method is called accrual. For every pay period an employee works, you’ll debit a PTO Expense account and credit a PTO Liability account. This liability shows what you owe your employees for time they’ve earned but haven’t used yet. When an employee takes a vacation day, you then reduce the liability account. This approach gives a more accurate picture of your company’s financial obligations and is one of the top features to look for in payroll software.

Wage Garnishments

A wage garnishment is a court order to withhold a portion of an employee’s earnings for the payment of a debt. Handling these requires precision and adherence to legal requirements. When processing a garnishment, you must deduct the specified amount from the employee’s net pay—that is, after all taxes and other deductions have been taken out. In your journal entry, you will debit the appropriate liability account for the garnishment and credit your cash account when you send the payment to the relevant agency. It’s essential to have a reliable system in place, as these are must-have payroll system features for staying compliant.

Avoid These Common Payroll Mistakes

Payroll can feel like a high-stakes tightrope walk. One wrong step, and you could be facing penalties, unhappy employees, and a major accounting headache. While payroll software and professional services can simplify the process, it’s still important to understand the common pitfalls that can trip up even the most careful business owners. Getting these details right from the start protects your business and builds trust with your team.

Let’s walk through some of the most frequent payroll mistakes and, more importantly, how you can steer clear of them. From classifying your team members correctly to keeping spotless records, a little bit of diligence goes a long way. Think of this as your guide to keeping your payroll process smooth, compliant, and stress-free. When you handle payroll with confidence, you can focus more on growing your business.

Employee Classification Errors

One of the most significant and costly mistakes is misclassifying an employee as an independent contractor. While it might seem like a simple distinction, the IRS has strict guidelines. Misclassifying workers can lead to hefty fines, back taxes, and other penalties. It’s essential to understand the differences in behavioral control, financial control, and the relationship between the parties to make the right call. If you’re unsure about a worker’s status, it’s always best to err on the side of caution and consult with a professional to ensure you’re compliant with tax laws.

Tax Calculation Mistakes

Payroll taxes are notoriously complex. Between federal, state, and local withholdings, there are a lot of moving parts to track. Manual calculations are a recipe for error, and even small mistakes can lead to incorrect withholdings. These errors can result in penalties and interest from tax authorities, not to mention frustrated employees. Using reliable payroll software with automated tax calculations is one of the best ways to minimize this risk. The software stays updated on the latest tax laws, so you don’t have to, ensuring your calculations are accurate every time.

Record-Keeping Oversights

Keeping accurate and detailed payroll records is non-negotiable. You need to maintain clear documentation of employee hours, wages, deductions, and tax withholdings for every pay period. These records are your proof of compliance and will be your best friend in the event of an audit. Failing to keep organized records can create major discrepancies and leave you scrambling for information when you need it most. Make it a habit to file everything digitally and back it up securely. This simple practice is essential for audit readiness and sound financial management.

Timing and Reconciliation Issues

Timing is everything in payroll. Processing payroll late can damage employee morale, while delays in recording the journal entries can throw your books out of balance. A common oversight is failing to reconcile payroll records with your bank statements and general ledger regularly. This step is crucial for catching discrepancies early, like a data entry error or a missed payment. Regular reconciliation confirms that the money that left your bank account matches what you recorded in your accounting system, ensuring your financial statements are always accurate.

How to Choose the Right Payroll Software

While you can certainly record payroll journal entries by hand, dedicated payroll software can transform a complex, time-consuming task into a streamlined, automated process. Think of it as your digital payroll assistant, one that works around the clock to ensure your team is paid correctly and on time, every single time. These platforms are designed to handle everything from calculating gross pay and deductions to filing payroll taxes with the right government agencies. This automation not only saves you precious hours but also dramatically reduces the risk of human error—which can lead to costly compliance issues down the road.

The market is full of options, and choosing the right one can feel overwhelming. The key isn’t to find the software with the longest list of features, but to identify the one that truly fits your business needs. Before you start comparing platforms, take a moment to think about your specific situation. How many employees do you have? Are they salaried, hourly, or a mix of both? What kind of benefits do you offer? Answering these questions will help you zero in on a solution that supports your business now and has the flexibility to grow with you. If you need help determining what level of payroll support your business requires, our team can walk you through the essentials.

Key Features for Small Businesses

When you’re just starting out, you need software that masters the fundamentals without overcomplicating things. Look for a user-friendly platform that offers essential features like automatic tax calculations, withholdings, and filings for federal, state, and local taxes. Direct deposit is another must-have, as it’s the most convenient way to pay your team. The software should also be able to generate and distribute W-2s and 1099s at year-end. Ultimately, the best system for a small business is one that simplifies compliance and makes payday a smooth, stress-free event for everyone involved.

Integration with Your Existing Tools

Your payroll system shouldn’t operate in a silo. To maintain accurate financial records and save yourself from hours of manual data entry, choose a software that integrates seamlessly with your other business tools. The most important connection is with your accounting software, which allows payroll expenses to flow directly into your general ledger. If you have hourly employees, an integration with your time-tracking system is a game-changer. This ensures that hours are imported automatically, eliminating manual calculations and reducing the chance of errors. A well-integrated system creates a single source of truth for your financial data.

Automation Capabilities

The real power of modern payroll software lies in its automation. A great platform will do more than just calculate paychecks; it will handle the entire tax process for you. This includes calculating how much you owe in payroll taxes, submitting the required forms, and making the payments on your behalf. This feature alone can save you from the headache of tracking multiple deadlines and navigating complex government websites. Look for software that also automates sending pay stubs to employees and reminds you of important deadlines, freeing you up to focus on running your business.

Employee Self-Service Portals

An employee self-service portal is a simple feature that delivers a huge return on investment. It gives your team members a secure online account where they can access their own payroll information whenever they need it. Employees can view and download their pay stubs, check their PTO balance, and access year-end tax forms like W-2s. Many portals also allow employees to update their personal information, such as their address or bank account details for direct deposit. This empowers your team and significantly cuts down on the number of administrative questions you have to field.

Reporting and Analytics

Good payroll software doesn’t just process payments—it provides valuable insights into your biggest expense: labor costs. Your system should offer robust reporting capabilities that allow you to see the big picture. Look for the ability to generate reports on payroll summaries, tax liabilities, and employee costs per department or project. This data is crucial for accurate budgeting, forecasting, and making strategic business decisions. Having easy access to this information helps you understand where your money is going and plan for future growth with confidence.

Best Practices for Managing Payroll

Once you have a system for recording payroll, the next step is to create habits that ensure consistency and accuracy. Think of these best practices as the foundation of a stress-free payroll process. They’re not just about following rules; they’re about protecting your business, keeping your team happy, and giving you confidence in your financial data. By implementing a few key checks and balances, you can catch errors before they become major problems and make sure your payroll runs smoothly every time. If setting this all up feels like a lot, remember that our team at Sound Bookkeepers is here to help you build a solid payroll foundation.

Set Clear Documentation Standards

Keeping detailed records is your best defense against future headaches. Every time you run payroll, you should save all the related information in an organized way. This includes the dates of payment, the gross amounts, a breakdown of all deductions, and the final net pay for each employee. Think of it as creating a clear paper trail. This habit is invaluable for a few reasons: it ensures you can answer any employee questions about their paystub quickly, it makes preparing for tax season much simpler, and it provides all the necessary proof if you ever face an audit.

Establish Internal Controls

You don’t need a huge accounting department to have strong internal controls. The core idea is simply to create a system of checks and balances to prevent errors and deter fraud. For example, the person who calculates payroll hours shouldn’t be the only one who approves the final payment. A supervisor is often in the best position to spot discrepancies, like an employee having too much overtime. Simple internal controls could involve having a manager review and sign off on timesheets before payroll is processed or having a second person double-check the final payroll register before funds are disbursed.

Create a Review Process

Before you ever hit “submit” on a payroll run, it’s crucial to have a final review process. Mistakes in payroll can be complicated to fix after the fact, so catching them beforehand saves everyone time and stress. This is where a second set of eyes becomes incredibly valuable. If possible, have another person on your team review the payroll entries for accuracy. They can check for obvious typos, confirm that pay rates are correct, and ensure all deductions have been properly applied. This simple step can prevent overpayments, underpayments, and compliance issues down the line.

Reconcile Accounts Regularly

Reconciliation is the process of making sure the numbers in your payroll records match the numbers in your main accounting books. Specifically, you’ll want to compare your payroll liabilities with your General Ledger accounts to confirm they line up. Doing this at least once a month helps you catch and fix discrepancies early, before they have a chance to snowball. Regular reconciliation ensures your financial statements are accurate, helps you stay on top of your budget, and gives you a clear picture of your labor costs and tax liabilities at all times.

How to Stay Compliant and Accurate

Recording payroll entries correctly is only half the battle; staying compliant with tax laws and regulations is the other. Think of it as the essential framework that supports your entire payroll process. Without it, even the most organized journal entries can lead to trouble. Federal, state, and even local governments have specific rules you need to follow, and they can change over time. Getting this right from the start protects your business from costly penalties, audits, and legal headaches. It’s all about creating a system that is both accurate and defensible, ensuring every number you record is backed by clear documentation and adherence to the law. A solid compliance strategy gives you peace of mind and lets you focus on growing your business, knowing your payroll is on solid ground.

Federal Tax Requirements

At the federal level, your main responsibility is to withhold and remit payroll taxes to the IRS. This process involves tracking all money related to paying your team, from their gross wages to the final net pay. The key taxes you’ll handle are federal income tax, Social Security, and Medicare (together known as FICA taxes), and federal unemployment tax (FUTA). You are responsible for withholding the correct amounts from your employees’ paychecks and paying the employer’s share of these taxes. The IRS provides clear guidelines for employers on these obligations, and following them is non-negotiable for staying compliant.

State and Local Regulations

Beyond federal rules, you also need to manage state and local payroll taxes, which can be particularly complex in the Pacific Northwest. For businesses in Washington, this means handling State Unemployment Insurance (SUI), contributing to the state’s Paid Family and Medical Leave program, and paying into the Workers’ Compensation Fund. These regulations are unique to our state and require careful attention to ensure you’re withholding and contributing the correct amounts for each employee. Staying informed about these specific requirements is crucial, as they directly impact your payroll calculations and tax filings. It’s a good idea to check state resources regularly for any updates.

How to Prepare for an Audit

No one likes the idea of an audit, but being prepared can make the process much smoother. Auditors look for red flags, so your goal is to maintain records that are clean and transparent. Some common triggers for an audit include unusual payroll activity, like a sudden rate adjustment without documentation, or an employee who shares an address with a vendor. The best way to prepare is to have strong internal controls and organized documentation from day one. The Washington State Auditor’s Office provides resources that can help you understand what they look for, allowing you to build a payroll system that is consistently accurate and audit-ready.

Record Retention Rules

Keeping detailed payroll records is a legal requirement and a business best practice. You need to save all information related to payroll transactions, including dates, amounts, and descriptions. This documentation is your proof of payment and compliance, which is invaluable for resolving any discrepancies or facing an audit. Generally, the IRS requires you to keep employment tax records for at least four years. This includes everything from timesheets and W-4 forms to payroll reports and proof of tax payments. Having a clear system for employment recordkeeping ensures you can always access the information you need when you need it.

How to Streamline Your Payroll Process

Managing payroll can feel like a constant time-sink, but it doesn’t have to be. With a few smart adjustments, you can create a system that is efficient, accurate, and much less stressful. Streamlining your process isn’t just about saving a few hours each month; it’s about reducing the risk of costly errors and giving yourself the confidence that your team is being paid correctly and on time. A smooth payroll system is a foundational piece of a healthy business, allowing you to focus more on growth and less on administrative headaches. Let’s walk through four practical steps to make your payroll process work for you, not against you.

Implement Automation

If you’re still running payroll manually, you’re making things harder than they need to be. Using modern HR and payroll software automates many of the most tedious steps, which significantly reduces the risk of errors and saves a ton of time each pay period. These platforms can automatically calculate withholdings, process direct deposits, and file payroll taxes for you. This shift frees you from complex calculations and ensures you stay compliant with ever-changing tax laws. By letting technology handle the heavy lifting, you can direct your energy toward more strategic parts of your business.

Create Standard Operating Procedures (SOPs)

An SOP is essentially a detailed checklist that outlines your payroll process from start to finish. Documenting every step—from collecting timesheets to final reconciliation—creates consistency and clarity. This is incredibly valuable if you have multiple people involved or if the primary payroll person is unavailable. A well-written SOP ensures that payroll is run the same way every single time, minimizing mistakes and making it easy for someone else to step in without missing a beat. It also serves as a fantastic training tool for new team members responsible for payroll tasks.

Train Your Team

Once you have a solid process and the right tools, it’s crucial that your team knows how to use them effectively. Make sure anyone handling payroll understands the process inside and out, including how to operate the software correctly. Training shouldn’t just be a one-time event. As you update your software or your SOPs, provide ongoing education to keep everyone on the same page. A well-trained team is your best defense against errors, as they’re more likely to spot inconsistencies and understand the importance of each step in the process.

Review Your System Regularly

Payroll is not a “set it and forget it” function. It’s important to schedule regular check-ins to ensure your system is still working efficiently and accurately. At least once a quarter, take time to compare your payroll records with bank statements and employee information to make sure everything matches up. This is also a good time to review employee classifications, pay rates, and benefit deductions. Regular reviews help you catch small issues before they become big problems. If this process feels overwhelming, remember that getting an expert eye on your books can provide invaluable peace of mind. You can always book a free consultation to have a professional review your process.

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Frequently Asked Questions

What’s the difference between my employee’s take-home pay and my actual cost for that employee? This is a fantastic question because it gets to the heart of your true labor costs. Your employee’s take-home pay is their gross wage minus their portion of taxes and benefit contributions. Your actual cost, however, includes their gross wage plus your company’s share of payroll taxes, such as Social Security, Medicare, and unemployment taxes. This is why your total payroll expense on your income statement is always higher than the sum of your employees’ paychecks.

Can I just use a spreadsheet to manage my payroll journal entries? While you technically can use a spreadsheet, especially if you only have one or two employees, it opens the door to significant risks. Manual data entry makes it easy for small typos to occur, which can lead to incorrect tax calculations and compliance issues. Payroll software or working with a professional bookkeeper automates these calculations and provides a clear, organized record, which saves you time and helps protect your business from costly errors.

How often do I need to create a payroll journal entry? You should create a new payroll journal entry every single time you run payroll. Whether you pay your team weekly, bi-weekly, or monthly, each pay run is a distinct financial event that needs its own corresponding entry in your general ledger. This consistent practice ensures your financial records are always up-to-date and accurately reflect your labor expenses for each specific period.

What’s the first step if I find a mistake in a payroll entry from a previous pay period? First, don’t panic—it happens. The most important thing is to address it quickly and document everything. The exact steps depend on the type of error, but your first move should be to identify the source of the mistake and calculate the correct figures. You will then need to make a correcting journal entry to adjust your books. Depending on the error, you may also need to adjust the employee’s next paycheck or file an amended tax form.

Why are withheld taxes recorded as a ‘liability’ if the money is going to the government? Think of your business as a temporary middleman. When you withhold taxes from an employee’s paycheck, that money doesn’t belong to you. You are simply holding it on behalf of your employee with the legal obligation to pass it along to the correct government agency. In accounting, any money you owe to an outside party is considered a liability. Once you make the tax payment, the liability is cleared from your books.