Prepaid Payroll Taxes

[dkobelt]

My balance sheet shows an amount of prepaid Federal and State taxes. These have been on here since 2005. I only recently started working here so I am assuming these were deposits drafted by ADP before year end and so there was no liability at the end of the year. I want to write them off but am not sure where to apply them to.

[LauraG]

A liability balance in January 2006 related to 2005 payroll is correct because the December 2005 (federal) and state 4Q05 payments are not sent until January 2006.

First confirm how ADP handled those payments as well as make sure that you don't owe them. Look for the 4Q05 tax forms to be sure.

In most cases, ADP will withhold the liability amounts and no entry to Prepaid Taxes is necessary. The usual entry is Debit tax expense/credit cash without impacting Prepaid taxes. Is this how the prior bookkeeper handled the payroll taxes?

If the entry was done in error and they are 2005 related then the correct entry would be Debit Prepaid tax/Credit Retained Earnings. Alternatively you could create a new expense account called "Prior Period adjustments" to use instead of RE so that these amounts stand out for your accountant at year end. He/She probably will instruct you to move them to RE.