Payroll expense is a usually a company’s largest deductible expense. That’s a huge impact on the bottom line. But there’s a world of difference between payroll and corporate taxes, according to consultant Gretchen Inouye, CPP.
At the American Payroll Association’s Annual Congress, Inouye walked attendees through the complicated world of corporate taxes.
Three key differences
Corporate taxes are usually based on an accrual method of accounting and the company’s fiscal year, which, Inouye pointed out, may or may not be a calendar year. Payroll taxes are based on constructive receipt and are always paid on a calendar-year basis. In addition, corporate tax forms and payroll tax forms may not report the same data the same way.
Those three differences make reconciling corporate taxes and payroll taxes difficult, she stressed.
Take salary and wage expenses, for example. Inouye noted that these items may be distributed in up to four sections of the corporate return. Further, she said, salaries and wages that a company incurs in the development of a capital project may not be fully deductible in the year in which the wages were paid or earned. Those expenses are, however, fully reportable on the 941 in the year wages are paid.
Timely example: implementing a new payroll system. Since payroll systems usually have a useful life greater than one year, the costs (including incremental labor costs) attributable to them are generally amortized over a set number of years.
Making everything jibe
Accurate accounting of payroll items for corporate tax purposes, as well as for the company’s financial reporting, is crucial. But, Inouye acknowledged, Payroll doesn’t always receive timely or thorough information that would facilitate setting up a payroll chart of accounts correctly.
With that caveat in mind, Inouye suggested that to facilitate reconciliations, Payroll add additional accumulators to the payroll system to account for differences in timing between fiscal and calendar years. Accumulators will also capture data the company needs to take any applicable tax credits.
Finally, Inouye noted that one way to ease these concerns is for the Payroll Department and the Corporate Tax Department to communicate on a regular basis.