The amount of federal income taxes withheld from an employee's gross pay is recorded as a(n):

• A. revenue
• B. payroll expense
• C. contra-asset
• D. current liability

Answer: (D)

Verified step by step guidance

1. Understand the concept of federal income taxes withheld: These are amounts deducted from an employee's gross pay by the employer and are owed to the government. The employer holds these funds temporarily before remitting them to the tax authorities.
2. Recognize the accounting classification: Federal income taxes withheld are not revenue, payroll expense, or contra-asset. Instead, they represent an obligation for the employer to pay the government, which makes them a liability.
3. Define current liability: A current liability is a financial obligation that is expected to be settled within one year. Since federal income taxes withheld are typically remitted to the government within a short period, they qualify as a current liability.
4. Record the transaction: When federal income taxes are withheld, the employer debits the employee's gross pay (payroll expense) and credits a liability account, such as 'Federal Income Taxes Payable,' to reflect the obligation to remit the funds.
5. Review the classification: Confirm that the withheld taxes are recorded as a current liability because they represent an amount owed to the government that will be settled in the near term.