Payroll Expenses

Any money paid to employees and contractors, as wells as taxes paid for them and costs associated with processing payroll are tax deductible. It is important to distinguish between taxes withheld and paid on behalf of an employee and taxes paid for an employee. In most cases employers must withhold tax from employee's paycheck and remit the to the federal and local tax agencies. These expenses are deducted as part of the salary but not as tax paid. On the other hand, the employer is responsible for paying half of the Social Security and Medicare taxes. Those are deducted as “taxes paid”. For example, a company paid $1,000 to its employee. $200 were withheld from $1,000 gross pay as taxes and remitted to tax agencies. Also, the company was responsible for paying $75 in Social Security and Medicare taxes. In the tax return $1,000 will be deducted as salaries paid and $75 will be deducted as tax paid. The costs of processing payroll such as the payroll processor fees are deductible as accounting or payroll processing costs.

The payments made to contractors are also tax deductible, typically as outside contractor expenses.