PAYCHEX INC Income Taxes Disclosure
Note L — Income Taxes
The components of deferred tax assets and liabilities are as follows:
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|
May 31, |
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In millions |
|
2025 |
|
|
2024 |
|
||||
Deferred tax assets: |
|
|
|
|
|
|
|
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||
Compensation and employee benefit liabilities |
|
$ |
|
69.2 |
|
|
$ |
|
60.3 |
|
Other current liabilities |
|
|
|
15.8 |
|
|
|
|
12.4 |
|
Tax credit carry forward |
|
|
|
10.4 |
|
|
|
|
0.2 |
|
Stock-based compensation |
|
|
|
24.4 |
|
|
|
|
16.5 |
|
Unrealized losses on available-for-sale securities |
|
|
|
13.6 |
|
|
|
|
40.1 |
|
Capitalization of research and development |
|
|
|
133.4 |
|
|
|
|
68.6 |
|
Leases |
|
|
|
15.6 |
|
|
|
|
13.9 |
|
Net operating loss (“NOL”) carry forwards |
|
|
|
28.9 |
|
|
|
|
5.0 |
|
Tax benefit of uncertain tax positions |
|
|
|
18.3 |
|
|
|
|
16.2 |
|
Gross deferred tax assets |
|
|
|
329.6 |
|
|
|
|
233.2 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
||
Deferred contract costs |
|
|
|
149.7 |
|
|
|
|
151.2 |
|
Capitalized software |
|
|
|
167.7 |
|
|
|
|
58.2 |
|
Depreciation |
|
|
|
2.0 |
|
|
|
|
0.3 |
|
Goodwill and intangible assets |
|
|
|
429.8 |
|
|
|
|
91.8 |
|
Operating lease right-of-use assets |
|
|
|
12.7 |
|
|
|
|
9.5 |
|
Other |
|
|
|
6.6 |
|
|
|
|
7.7 |
|
Gross deferred tax liabilities |
|
|
|
768.5 |
|
|
|
|
318.7 |
|
Net deferred tax liability |
|
$ |
|
(438.9 |
) |
|
$ |
|
(85.5 |
) |
The deferred tax asset related to NOL carry forwards is comprised of $16.0 million of federal NOL carry forwards, $11.7 million of state NOL carry forwards, and $5.3 million of foreign NOL carry forwards. The federal NOL carry forwards were acquired through various acquisitions. Certain federal NOL carry forwards have indefinite lives, while others expire between the fiscal years ending May 31, 2028 and May 31, 2037. The state NOL carry forwards expire between the fiscal years ending May 31, 2026 through May 31, 2044.
The components of the provision for income taxes are as follows:
|
|
Year ended May 31, |
|
||||||||||||
In millions |
|
2025 |
|
|
2024 |
|
|
2023 |
|
||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
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|||
Federal |
|
$ |
|
418.8 |
|
|
$ |
|
433.5 |
|
|
$ |
|
418.1 |
|
State |
|
|
|
118.4 |
|
|
|
|
117.4 |
|
|
|
|
117.1 |
|
Non-U.S. |
|
|
|
(2.8 |
) |
|
|
|
6.5 |
|
|
|
|
(0.3 |
) |
Total current |
|
|
|
534.4 |
|
|
|
|
557.4 |
|
|
|
|
534.9 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
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|||
Federal |
|
|
|
(9.9 |
) |
|
|
|
(18.6 |
) |
|
|
|
(34.2 |
) |
State |
|
|
|
(2.7 |
) |
|
|
|
(4.6 |
) |
|
|
|
(7.4 |
) |
Non-U.S. |
|
|
|
(3.2 |
) |
|
|
|
(6.6 |
) |
|
|
|
(2.4 |
) |
Total deferred |
|
|
|
(15.8 |
) |
|
|
|
(29.8 |
) |
|
|
|
(44.0 |
) |
Income taxes |
|
$ |
|
518.6 |
|
|
$ |
|
527.6 |
|
|
$ |
|
490.9 |
|
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
|
|
Year ended May 31, |
|||||||||||||
|
|
2025 |
|
2024 |
|
2023 |
|||||||||
Federal statutory tax rate |
|
|
21.0 |
|
% |
|
|
21.0 |
|
% |
|
|
21.0 |
|
% |
Increase/(decrease) resulting from: |
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|
|
|
|
|
|
|
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|
|
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|||
State income taxes, net of federal tax benefit |
|
|
4.2 |
|
% |
|
|
4.0 |
|
% |
|
|
4.2 |
|
% |
Stock option windfall benefit |
|
|
(0.4 |
) |
% |
|
|
(0.4 |
) |
% |
|
|
(0.4 |
) |
% |
Tax credits |
|
|
(1.1 |
) |
% |
|
|
(0.8 |
) |
% |
|
|
(0.7 |
) |
% |
Other items |
|
|
0.1 |
|
% |
|
|
— |
|
% |
|
|
(0.1 |
) |
% |
Effective income tax rate |
|
|
23.8 |
|
% |
|
|
23.8 |
|
% |
|
|
24.0 |
|
% |
The effective income tax rates in all periods were impacted by recognition of net discrete tax benefits related to employee stock-based compensation payments.
Uncertain income tax positions: The Company is subject to U.S. federal income tax, numerous local and state tax jurisdictions within the U.S., and taxes in Europe. The Company maintains a reserve for uncertain tax positions. As of May 31, 2025, the reserve for uncertain tax positions, including interest and net of benefits, was $108.6 million, of which $100.6 million was included in long-term liabilities and $8.0 million was netted in the deferred tax on the Consolidated Balance Sheets. As of May 31, 2024, the total reserve for uncertain tax positions, including interest and net of federal benefits, was $86.4 million and was included in long-term liabilities on the Consolidated Balance Sheets.
A reconciliation of the beginning and ending amounts of the Company’s gross unrecognized tax benefits, not including interest or other potential offsetting effects, is as follows:
|
|
Year ended May 31, |
|
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In millions |
|
2025 |
|
|
2024 |
|
|
2023 |
|
||||||
Balance as of beginning of fiscal year |
|
$ |
|
87.2 |
|
|
$ |
|
72.0 |
|
|
$ |
|
50.2 |
|
Additions for tax positions of the current year |
|
|
|
20.1 |
|
|
|
|
20.6 |
|
|
|
|
20.6 |
|
Additions for tax positions of prior years |
|
|
|
9.8 |
|
|
|
|
0.8 |
|
|
|
|
4.6 |
|
Reductions for tax positions of prior years |
|
|
|
(5.5 |
) |
|
|
|
(3.8 |
) |
|
|
|
(2.1 |
) |
Settlements with tax authorities |
|
|
|
(0.0 |
) |
|
|
|
(0.3 |
) |
|
|
|
(0.4 |
) |
Expiration of the statute of limitations |
|
|
|
(5.6 |
) |
|
|
|
(2.1 |
) |
|
|
|
(0.9 |
) |
Balance as of end of fiscal year |
|
$ |
|
106.0 |
|
|
$ |
|
87.2 |
|
|
$ |
|
72.0 |
|
The reserve as of May 31, 2025 substantially relates to the Company’s uncertain tax positions for certain U.S. federal and state income tax matters. The Company believes the reserve for uncertain tax positions, including interest and net of federal benefits, of $108.6 million as of May 31, 2025 adequately covers open tax years and uncertain tax positions up to and including fiscal 2025 for major taxing jurisdictions. As of May 31, 2025 and 2024, the $100.6 million and $86.4 million, respectively, of unrecognized tax benefits, including interest and net of federal benefit, if recognized, would impact the Company’s effective income tax rate.
The Company has concluded all U.S. federal income tax matters through fiscal 2017. Fiscal years 2018 and 2020 are currently under audit by the IRS. With limited exception, state income tax audits by taxing authorities are closed through fiscal 2021, primarily due to expiration of the statute of limitations.
The Company continues to follow its policy of recognizing interest and penalties accrued on tax positions as a component of income taxes on the Consolidated Statements of Income and Comprehensive Income. The amount of accrued interest and penalties associated with the Company’s tax positions is immaterial to the Consolidated Balance Sheets. The amount of interest and penalties recognized for fiscal years 2025, 2024, and 2023 was immaterial to the Company’s results of operations.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Jul 11, 2025 | Showing above |
| 2024 | Jul 11, 2024 | |
| 2023 | Jul 14, 2023 | |
| 2022 | Jul 15, 2022 | |
| 2021 | Jul 16, 2021 | |
| 2020 | Jul 17, 2020 | |
| 2019 | Jul 24, 2019 | |
| 2018 | Jul 20, 2018 | |
| 2017 | Jul 21, 2017 | |
| 2016 | Jul 22, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.