Chapter 12: Payroll Accounting

Accounting 1Last Update: 2/7/11

Essential Outcomes

12. Understands and applies payroll theories and procedures by being able to:a. Explain the importance of accurate payroll

recordsb. Calculate gross earnings using different

methodsc. Explain and calculate different types of

deductions from gross earnings d. Prepare a payroll registere. Prepare an employee’s earnings recordf. Define the accounting terms used in chapter

Payroll

List of the employees & payments due to each employee for specific pay period

Pay period: amount of time over which an employee is paid

WeeklyEvery two weeks (bi-weekly)Twice a month (semimonthly)Monthly

Payroll Clerk

Person responsible for preparing payroll

Makes sure employees paid on timeMakes sure each employee is paid correct amountCompletes payroll recordsSubmits payroll reportsPays payroll taxes

Calculating Gross

Earnings

Gross Earnings

Total amount of money an employee earns in a pay period

Calculating gross earnings depends on the bases on which employee is paid:

SalaryHourly wageCommissionSalary plus commission or bonusOvertime pay

Salaries

Fixed amount of money paid to an employee for each pay period.

Earns certain amount of money regardless of the hours of service to company

Example: Salaried person earns $60,000 a year. $60,000 / 12 = $5,000 a month or $5,000/4 = $1,250 every week before taxes.

Hourly Wage

Amount of money paid to an employee at a specified rate per hour worked

Multiple the number of hours work by the hourly wage

Example:

$7.25 x 36 hours worked = $261.00 before taxes

Time Cards

On time cards, companies divide an hour into four 15-minute quarters in measuring employee work time

Quarter Hour ExampleOn the hour 2:00 p.m.

15 minutes after the hour

2:15 p.m.

30 minutes after the hour

2:30 p.m.

45 minutes after the hour

2:45 p.m.

Time Cards

On time cards, companies divide an hour into four 15-minute quarters in measuring employee work time

Actual Time Recorded Nearest Quarter Hour

7:58 a.m. 8:00 a.m.

12:25 p.m. 12:30 p.m.

1:32 p.m. 1:30 p.m.

4:18 p.m. 4:15 p.m.

Reading Time Cards

Day: Mon., Tues., etc. In: Time checked in Out: Time checked

out for lunch In: Time checked In Out: Time checked

out for the day Total: number of

hours worked on that day

Total Hours: number of hours worked for week

Totaling Time Cards

Hours: Place # of hours worked for pay period

Rate: Amount paid per hour Amount: Multiple Hours x Rate = Amount Overtime: amount worked over 40 hours

for that pay period.

Calculating Over Time Pay

Overtime: amount that exceeds 40 hours in a week (80 hours if bi-weekly)

Overtime rate: Set by the Fair Labor Standards Act of 1938—must pay 1 ½ (1.5) times the employees regular hourly pay rate

Example: Employee is paid $7.25 an hour.

Overtime Rate: $7.25 x 1.5 = $10.88Hours worked: 44—of the 44, 4 are

overtime.

Calculating Over Time Pay

40 x $ 7.25 = $290.00

4 x $10.88= $ 43.5244 hours $333.52

Commission

Amount paid to an employee based on a percentage of the employee’s sales

Sales employees often paid on commission

Example: Total sales: $8,254 Commission: 3%

$8,254 x 3% (.03) = $412.70

Salary + Commission

Some sales people earn a base salary + commission

Paid salary: $200 a week3% of sales:Sales: $4,810

$4,810 x 3% (.03) = $144.30 + $200 = $344.30

Go to page 292 in book; problem 12-1

Payroll Deductions

Determining Deductions from Gross Earnings

Amount deducted from check, either required by law (taxes) or requested by employee

Results in “net pay” being less than gross earnings

Deductions Required by Law

1. Federal Income Tax

2. Social Security Tax (FICA) Social security

tax Medicare tax

3. State and Local Income Taxes

Federal Income Tax

1. Paid to federal government based on annual income

2. Employers are required to withhold a certain amount of money from each payroll check

3. Employer sends money paid by employees to federal government

4. Employer acts as collection agency for federal government

Federal Income Tax

1. Amount owed to government based on estimated of amount of income tax employee will actually owe

2. Exact amount is determined when employee prepares an income tax return

3. Overpay, receive a refund4. Underpay, amount is due

when tax return is filed

Federal Income Tax – Form W-4

1. Amount withheld depends on 3 factors: Employee’s marital status Number of allowances claimed by

employee Employee’s gross earnings

2. First two are found on the W-4 statement3. Form W-4 filled out by each employee

when starting a job

Example of W-4 on next page

Federal Income Tax – Form W-4

Tax Tables

1. Most employers use federal tax tables to determine federal income tax

2. See page 295 in book

Social Security Tax

1. Present social security system established by Federal Insurance Contribution Act (FICA) in 1935 by Congress

2. Provide income to certain individuals: Old-age & disability insurance to

retired & disabled persons & their dependents

Survivors benefits to spouse & dependents of deceased worker

Medicare program provides health insurance benefits for elderly

Social Security Tax

1. SS tax is an exact tax2. Rates are set by Congress3. Two types of SS tax:

Social security taxMedicare tax

4. Tax rates are as follows:Social Security: 6.20%Medicare Tax: 1.45%

Total FICA tax 7.65%

Social Security Tax

1. Social Security: maximum amount to be taxed today is: $106,800 (the book will use $68,400)

2. Medicare: has no maximum

State & Local Taxes

1. Most state & cities tax earnings of people who live in their state or city

2. Usually set as % of gross earnings

Voluntary Deductions

1. Other deductions by employees are voluntary, including:

Union duesHealth insuranceLife insurancePension & other retirement contributions –401(k) & 403(b)Credit union deposits and paymentsU.S. savings bondsCharitable contributions

Go to page 298 in book & due Problem 12-2

Payroll Records

Completing the Payroll Register

1. Payroll Register: form that summarizes information about employees’ earnings for each pay period

2. Includes:Employees’ I.D. #NameMarital statusNumber of allowances claimed

Completing the Payroll Register

Page 298 in your book

Preparing Payroll Checks

Payroll Checks

1. Payroll check is written for each employee for “Net pay” amount

2. Company has only few employees, checks are written from regular checking account

3. Companies with many employees, usually use a separate checking account

Payroll Checks

1. Separate checking account used, need to transfer funds from regular checking into payroll checking account

2. The amount of transfer is for the “total net pay” for all employees

3. Then, individual checks are written to each employee from the payroll checking account

Direct Deposit

1. If company does direct deposit, net pay is deposited in the employee’s personal bank account by employee

2. No check is written

Employees’ Earnings Records

Employees Earnings Record

1. Record contains all of payroll information for each employee, so that employee and employer knows how much has been paid and deducted for each pay period

Employees Earnings Record

Page 304 in your book

On to some hands on work…

Accounting 1

That’s all

folks!