Tracking & Paying Employee Taxes

I think what you are missing is that employer taxes are above and beyond gross wage and are not a deduction from pay. As a subchapter S your working shareholders MUST be paid as employees and receive a W2. Gross wage is taxable wage and deductions are deductions. 

If gross wage is $10000, net is reduced only by employee deductions for FICA, FWT, state and local  FICA would be $765. Employer share on top would be $765, thus gross payroll would be 10765. Net pay would be 10,000 minus fica of 765 minus FWT minus state and local. 

For your example, $10000 is your wage expense, $1000 is your employer tax expense, $3000 fed and $1000 state are liabilities and net pay is $6000 not $5000.

Nothing related to the mandatory W2 treatment is considered a distribution.  Distributions cannot happen until AFTER W2 wages corresponding to IRS definition of "reasonable wage" are paid.

The 4k of fed and state employee taxes are, as I said, posted as liabilities when reducing the gross wage to net wage. The employer share also posted on the date of payroll as an expense and a liability. Then, within 3 business days based on amount you are paying, you will deposit a total of $4k to feds and $1 to state

Hi John,

I totally get what you are saying on the the amount on top of the gross wages amount.  You are right, I wasn't thinking about that correctly.  (Though did manage to get it right in our books).  But that is the missing piece of the equation and explains why the "employer portion" is booked seperately on the income statement from the wage expense.

The old CPA firm basically intended for us to have slop on the books for a year at a time, and than at the end of the year they would come in review payroll and issue journal entries to "tie out" all the wage costs and a future distribution for any remaining profits.  

I guess they like this approach because your books become so mangled that it's really hard to unwind from "their process".

(Absolute nightmare scenario -- wish I could name them publicly; I'm dangerous enough to run our books and not massively screw up anything).

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Do you have any opinion on posting all the sub-payments to various liability accounts?  In reality in QBO, our payroll processor just pulls everything out in one shot.

Does it make sense to a do a same journal entry to post to the applicable short term liability account and then pull it out from cash on the balance sheet?  (Optically, when you go back to your books you have a duplicate record of what was done and why... at the expense of extra time crafting the journal entries).