Payroll - Accrual Method

[Gretel]

If T/P uses accrual method of accounting and pays wages on 1/3/2010 for hours worked in 2009, are these expenses accrued in 2009? (Just tax return implications)

Are all payroll expenses associated with 2009 and paid within 2 1/2 months to be accrued? Like bonus for shareholder? ... or are all payroll expenses for shareholder only deductible in year paid?

How about workers compensation insurance? To be accrued according to hours worked?

I am still hoping to find some good reference materials (other than IRS Pub) for accrual accounting.

[veritas]

Accruals

The wages would be an expense in 2009.

Also you have an accrual for payroll taxes for payroll paid in 2009.

The question is can you also accrue payroll taxes on accrued wages? If memory serves the IRS did finally say ok. But my memory also says this must have been done consistently in the past.

I believe the workers comp is no accrual. It must actually have been paid in 2009.

[AJsTax]

Why

would not the Workers Comp be accrued? I understand that comp works differently in each state but:
a) all events have occurred that fix the fact of liability (employees worked the hours) and
b) the liability can be determined with reasonable accuracy. [wages paid (or due to be paid) times the comp rates equals the amount due for workers comp.]

If wages due for the last days of the year are accrued then all payroll taxes should also be accrued, FUTA, SUTA, Comp. etc.
Some even do it for every quarter financial reports. Now that is a pain!

[Bees Knees]

TTB, page SB11-4 says:

When is the payroll tax liability incurred? Wages are considered
paid when they are credited to the account or set apart for
an employee so that they may be drawn upon by the employee at
any time without any substantial limitation or restriction. [Reg.
§31.3121(a)-2]

Example: Mitch receives his paycheck from ARC, Inc. on
January 7, 2009, for the pay period December 16, 2008
through December 29, 2008. His wages will be reported
on his 2009 Form W-2, and ARC, Inc. will report the
payroll tax liability in the first quarter of 2009.
This is true regardless of whether ARC, Inc. is a
cash or accrual accounting method taxpayer.

Deferred compensation. For an accrual taxpayer, if the all events
test and the recurring item exception are met, a deduction for
payroll taxes is allowed in the year the deferred compensation is
earned, even though it is paid in the following year. See IRC Section
461 for details regarding the all events test and the recurring
item test. (Rev. Rul. 2007-12)

Bonuses and vacation pay. The IRS has announced a new safe harbor
method of accounting for taxpayers using the accrual method
that incurs FICA and FUTA liabilities for bonuses and vacation
pay. Under the safe harbor method, a taxpayer will be treated as
satisfying the recurring item exception in the same year all events
have occurred that establish the fact of the related compensation
liability, and the amount of the related compensation liability can
be determined with reasonable accuracy. (Rev. Proc. 2008-25)

A taxpayer’s change in the treatment of payroll tax liability to deduct
taxes under the revenue ruling or revenue procedure is considered
a change in accounting method requiring IRS consent.

Note: The above is talking about the payroll tax liability, not the actual wage itself.

[Bees Knees]

As for the actual wage, TTB page 8-22 says:

Employee compensation. Economic performance occurs as an
employee renders service to the employer. However, deductions
for compensation or other benefits paid to an employee in a year
subsequent to economic performance are subject to the rules
governing deferred compensation, deferred benefits, and funded
welfare benefit plans. See Tab 13 for retirement and employee
benefits.

Related party rules. If an expense is paid to a related person
who uses the cash method of accounting, the expense is not deductible
until actually paid to the related person.

Payments by accrual basis partnership to cash basis partner. A partnership
that uses an accrual method of accounting cannot deduct
any business expense owed to a cash basis partner until the
amount is paid. However, this rule does not apply to guaranteed
payments made to a partner, which are generally deductible
when accrued.

Thus, an accrual basis employer cannot deduct shareholder wages (a related party) until that shareholder reports wages as income. If the shareholder is a cash basis taxpayer, then the accrual basis employer has to deduct wages under the cash method.

[Gretel]

TTB, page SB11-4 says:

Example: Mitch receives his paycheck from ARC, Inc. on
January 7, 2009, for the pay period December 16, 2008
through December 29, 2008. His wages will be reported
on his 2009 Form W-2, and ARC, Inc. will report the
payroll tax liability in the first quarter of 2009.
This is true regardless of whether ARC, Inc. is a
cash or accrual accounting method taxpayer.

Thanks to everyone. Bees I read and re-read and I am still confused and maybe not understanding. The Rev.Ruling below seems to contradict the statement above. Taxes for wages accrued and not paid in the same calendar year are treated like Deferred compensation, right? Going by the Rev.Rul. below that should be deductible in year accrued even though the wages themselves are not deductible.

Maybe they are deductible only because of recurring item exception?

The whole thing doesn't make much sense: Wages deductible in year following the year you already can deduct the payroll taxes thereof.

I am still not clear if workers comp. insurance falls under payroll taxes or insurance.

Deferred compensation. For an accrual taxpayer, if the all events
test and the recurring item exception are met, a deduction for
payroll taxes is allowed in the year the deferred compensation is
earned, even though it is paid in the following year. See IRC Section
461 for details regarding the all events test and the recurring
item test. (Rev. Rul. 2007-12)

[Bees Knees]

The Rev.Ruling below seems to contradict the statement above. Taxes for wages accrued and not paid in the same calendar year are treated like Deferred compensation, right? Going by the Rev.Rul. below that should be deductible in year accrued even though the wages themselves are not deductible.

Maybe they are deductible only because of recurring item exception?

Rev. Rul. 2007-12 is an exception to the general rule under Reg. §31.3121(a)-2. In general, you deduct the employee's share of FICA at the same time that you report the wages as income to the employee. This is true regardless of accrual or cash method.

However, Rev. Rul. 2007-12 kicks in under certain deferred comp plans where wages are deferred but the deduction for taxes are allowed.

Rev. Rul. 2007-12 says:

If the all events test and recurring item exception of § 461 are otherwise met, an
accrual basis taxpayer may treat its payroll tax liability as incurred in Year 1, regardless
of whether the compensation to which the liability relates is deferred compensation that
is deductible under § 404 in Year 2.

Don't ask me the logic behind it. Those are simply the rules.

[Gretel]

Thanks, Bees. I am not asking. It sure helps to know that this is an exception.

If payroll is not really an issue with the accrual method of accounting then - for a very small company - it's actually only A/P, A/R and expenses that cover more than the current year to be concerned about.

[Bees Knees]

I never do accrual for small companies, even if they have inventory. Any business with less than $1 million average annual receipts can use cash, even if the business must keep inventories. Under the cash method, you still must keep inventories and deduct COGS when the item sells. Otherwise, AR and AP is not needed under cash.

[Nashville]

Payroll Taxes - Deferred Income

However, Rev. Rul. 2007-12 kicks in under certain deferred comp plans where wages are deferred but the deduction for taxes are allowed.

Don't ask me the logic behind it. Those are simply the rules.

OK, I won't ask you the logic behind it, we probably agree it doesn't make a lot of sense and somewhat generous for IRS to allow this considering their stingy position on other accruals which don't get paid promptly.

But question now becomes, "How do you deduct?"

Example: XYZ Corp has a $2,000,000 payroll, with $1,950,000 on W-2s and $50,000 in deferred comp. Deferred comp being Code "D" in Box 12 of their W-2s. Of the $1,950,000, some $75,000 is earned in 2009 and will not be paid until 2010. For an accrual corp, payroll taxes on the $75,000 may be deducted. If paid in January, most of this money will have very fat SUTA taxes since the employees start all over again in January in meeting the threshold.

However, you are now telling me we may deduct payroll taxes on the $50,000 as well???
The $50,000 may NEVER be paid, and even so, what payroll tax rates do we use? 7.65% FICA/medicare? SUTA before or after the limit is reached?

Does not compute. I think I have misunderstood the definition of "deferred" pay. Have I??

[Gretel]

Neither do I, this is why I have a hard time getting all my ducks in a row. Besides, rules in Germany are more logic and this mixed bag of information really throws me off.

This client is a construction company with anticipated bigger contracts. I don't have much choice and it's certainly better to start off on the right foot then to convert two years down the road.

[Bees Knees]

The key is:

If the all events test and recurring item exception of § 461 are otherwise met...

If those conditions are met, the deferred comp WILL be paid. If there is a question about whether or not deferred comp will be paid, then I doubt Section 461 is satisfied.

[Bees Knees]

If you do not have deferred comp, then ignore the Rev. Rul.

You simply deduct the payroll taxes in the year the wage is paid, regardless of accrual or cash method. For corporate shareholders, don't try to deduct wages in a year prior to the year the shareholder reports the wage as income. If you keep those two rules in your head, you should be fine.

[veritas]

payments made for workers compensation

as required by law are deductible when paid.

[Gretel]

Thanks again, everyone. I feel much more comfortable now.