Cash-Method Employers: Deducting Compensation

When do cash-method employers deduct compensation?

(A) When they are earned
(B) When they are paid
(C) When they are accrued
(D) When they are budgeted

Final answer:

Cash-method employers deduct compensation when it is paid. The cash method accounts for income and expenses when the cash is transacted, unlike the accrual method.

Do you want to know when cash-method employers deduct compensation? The answer is when they are paid, which is option (B) in this case.

Let's dive into the explanation to understand why this is the correct answer.

Explanation:

When it comes to deducting compensation, cash-method employers deduct compensation when it is paid (B). Unlike the accrual method, which recognizes income and expenses when they are earned or incurred, the cash method does this when the cash actually changes hands. Therefore, any deductions from an employee's wages, which may include withholding tax, social security contributions, and various insurance premiums, are only accounted for when the payment is made to the employee.

Taxes paid by the employer based on the employee's wages, such as employer contributions to the social security system, are similarly recognized for deduction when these payments are made.