Which statement best describes how withheld taxes should be handled?

• A. The withheld taxes must be kept in a separate account and not used for anything else.
• B. The taxes may be used for other payments.
• C. The taxes may be invested in company stock.
• D. The taxes may be treated as operating revenue.

Answer: (A)

Withheld taxes are funds collected from employees that must be paid to government authorities. They are not the company’s money and should be kept in trust until they’re remitted. Because of this, the best practice is to maintain withheld taxes in a separate account and not use them for any other purpose. This separation ensures they aren’t mixed with operating cash and helps meet deposit schedules and legal requirements. Using withheld taxes for other payments, investing them, or treating them as operating revenue would misappropriate public funds and could bring penalties and interest. Keeping them in a dedicated account keeps payroll obligations clear and properly accounted for.