Federal income taxes withheld by the employer on behalf of the employee are recorded as

Federal income taxes withheld by the employer on behalf of the employee are recorded as

A revenues.

B current liabilities.

C expenses.

D receivables.

The correct answer and explanation is:

The correct answer is B current liabilities.

When an employer withholds federal income taxes from an employee’s paycheck, those amounts are not expenses or revenues for the employer. Instead, the employer is acting as an agent who collects taxes on behalf of the government. These withheld taxes are amounts the employer must eventually remit to the government.

Here is why these withheld taxes are recorded as current liabilities:

1. Definition of liability: A liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources. In this case, the employer has an obligation to pay the withheld taxes to the government.
2. Current liabilities: Since the employer is required to remit the withheld taxes to the government within a short time frame, these amounts are classified as current liabilities. Current liabilities are obligations the company expects to settle within one year or within its operating cycle.
3. No impact on employer’s expenses: The withheld federal income taxes belong to the employee, not the employer. The employer’s payroll expenses include gross wages paid to employees plus any employer payroll taxes but do not include the amounts withheld from employees for their own taxes.
4. Accounting treatment: When payroll is processed, the employer debits wage expense for gross wages, credits cash for net pay to employees, and credits various liability accounts, including federal income tax withholding payable, which represents amounts to be paid to the government.

Therefore, the employer’s role is to hold these withheld amounts temporarily and pass them on to the government. Until payment is made, these withheld taxes represent a current liability on the employer’s balance sheet. This accounting ensures clear separation of employee obligations from employer expenses and liabilities.