Which of the following statements about payroll liabilities is correct?

• A. Payroll liabilities are only recorded after the payroll is paid to employees.
• B. Payroll liabilities include amounts owed to employees and government agencies for wages and payroll taxes.
• C. Payroll liabilities do not include employer payroll taxes.
• D. Payroll liabilities are classified as long-term liabilities on the balance sheet.

Answer: (B)

Verified step by step guidance

1. Understand the concept of payroll liabilities: Payroll liabilities are obligations a company owes related to employee compensation and payroll taxes. These include amounts owed to employees for wages and salaries, as well as amounts owed to government agencies for payroll taxes such as Social Security, Medicare, and unemployment taxes.
2. Clarify the timing of recording payroll liabilities: Payroll liabilities are recorded when the obligation arises, not only after the payroll is paid. For example, when employees earn wages, the company incurs a liability even if the payment is made later.
3. Identify the components of payroll liabilities: Payroll liabilities include both amounts owed to employees (e.g., wages, salaries, bonuses) and amounts owed to government agencies (e.g., payroll taxes withheld from employees and employer payroll taxes). Employer payroll taxes, such as Social Security and Medicare contributions, are also part of payroll liabilities.
4. Classify payroll liabilities on the balance sheet: Payroll liabilities are typically classified as current liabilities because they are expected to be settled within one year. They are not classified as long-term liabilities unless there is a specific reason for a longer settlement period.
5. Evaluate the statements provided: Based on the explanations above, the correct statement is: 'Payroll liabilities include amounts owed to employees and government agencies for wages and payroll taxes.' The other statements are incorrect because payroll liabilities are recorded when incurred, include employer payroll taxes, and are generally classified as current liabilities.