©CourseColleg.com 1 12 Payroll For example: Wages Payable, FICA Payable Learning Objectives...

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12 Payroll

ProfitDebit Credit or

Loss

Expenses

BALANCE SHEET INCOME STATEMENT

Assets Liabilities Revenue

Equity

For example:

Wages Payable,

FICA Payable

Learning Objectives

1. Explain payroll concepts and terminology

2. Calculate gross earnings , employee and employer taxes and deductions

3. Prepare and record payroll

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2Objective 12.1: Explain payroll concepts and

terminology

Payroll describes the payment process for employee compensation. It is governed by a complex series of federal, state and even local laws

designed to facilitate the collection of taxes and to protect the rights of the

employee.

O12.1

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Legislation

Income Tax Withholding Laws with the federal withholding authorized by the Tax Payment Act of 1943. State

withholding varies on a state by state basis.

Income Tax Withholding Laws with the federal withholding authorized by the Tax Payment Act of 1943. State

withholding varies on a state by state basis.

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Legislation

Fair Labor Standards Act of 1938

which set payroll recording keeping requirements, minimum wage and overtime provisions and equal pay

for equal work requirements for most firms involved in interstate

commerce.

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Legislation

Federal Insurance Contributions Act (FICA) which established the

Social Security system now comprised of OASDI (Old Age, Survivors &

Disability) and HI (Hospital Insurance –part of Medicare).

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LegislationFederal Equal Opportunity Employment

Laws(Civil Rights Acts of 1964 and 1991; the Equal Pay Act of 1963; the Age

Discrimination Act of 1967 and the Americans With Disabilities Act of 1990)

• Equal Employment Opportunity laws prohibits discrimination in hiring, firing, promotion or compensation based on color, race, religion, national origin or gender.

• Age Discrimination law prohibits the use of age to discriminate in hiring, firing and promoting employees.

• Americans with Disabilities Act prohibits discrimination against employees and candidates for jobs based on their disability

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Legislation

Unemployment Tax Acts -the federal act was passed in 1935 and

state laws followed.

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Legislation

State Employment Acts such as workers compensation and disability

insurance, minimum wage and maximum hours laws which can vary

on a state by state basis.

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Employee compensation• Payroll involves many different

compensation methods, the most common distinction is compensation by wage or by salary.

• Wages are generally based on an hourly rate or a piecework basis.

• Salaries are usually expressed by the month or the year rather than an hourly rate.

• Payroll involves many different compensation methods, the most common distinction is compensation by wage or by salary.

• Wages are generally based on an hourly rate or a piecework basis.

• Salaries are usually expressed by the month or the year rather than an hourly rate.

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Employee or Contractor

• Behavioral control (for example -where, when and how to complete the work )

• Financial control (for example -does the worker make these services available to others in the market?)

• The type of relationship (for example –a temporary versus a permanent relationship)

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Payroll terminology

• FIT –Federal Income Tax withheld. This is a required deduction which depends on an employee’s particular income tax situation (determined by completing a W4 form).

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Payroll terminology

• FICA –Federal Insurance Contributions Act (Social Security) There are two components Social Security taxes and Medicare Taxes. The are designed to provide workers with supplemental retirement income, medical and employment disability benefits.

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Payroll terminology

State and Local Income taxes -Required tax deductions which will depend on an employee’s tax liability from the payroll being calculated.

State and Local Income taxes -Required tax deductions which will depend on an employee’s tax liability from the payroll being calculated.

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Payroll terminology

Medical Insurance (optional)–A typical employee portion of medical insurance benefits provided by the employer.

Medical Insurance (optional)–A typical employee portion of medical insurance benefits provided by the employer.

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Payroll terminology

Voluntary\other deductions• Retirement contributions• Charitable contributions• Union dues• Savings plans

Voluntary\other deductions• Retirement contributions• Charitable contributions• Union dues• Savings plans

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Payroll terminology

Involuntary deductions• Garnishments -payments to

creditors ordered by the court• Child Support payments

Involuntary deductions• Garnishments -payments to

creditors ordered by the court• Child Support payments

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Payroll terminology

The gross earnings minus the above deductions equal the net pay received by the employee for each pay period.

The gross earnings minus the above deductions equal the net pay received by the employee for each pay period.

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Payroll Expenses Funded by the Employer

• FICA –Same dollar amount as paid by employees. The employer is required to match dollar for dollar all FICA taxes paid by the employee.

• FICA –Same dollar amount as paid by employees. The employer is required to match dollar for dollar all FICA taxes paid by the employee.

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FUTA –Federal Unemployment Insurance. This is a tax paid by the employer to provide employees with jobless benefits should they be laid off. It is designed to reimburse states for administrative costs in providing unemployment benefits.

• SUTA –State Unemployment Insurance. Paid by

the employer only in most states to provide jobless benefits. Designed to provide temporary income to employees who are laid off through no fault of their own.

FUTA –Federal Unemployment Insurance. This is a tax paid by the employer to provide employees with jobless benefits should they be laid off. It is designed to reimburse states for administrative costs in providing unemployment benefits.

• SUTA –State Unemployment Insurance. Paid by

the employer only in most states to provide jobless benefits. Designed to provide temporary income to employees who are laid off through no fault of their own.

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• Medical Insurance and other employee benefits (optional)–The employer portion of medical insurance or any other benefits which the employer may offer to provide for employees.

• Worker’s Compensation Insurance –This is required on a state by state basis and provides for medical expenses and compensation for lost wages for employees from job related injury and illness.

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Retirement benefits –The employer may have commitments to retirement benefits for its’ employees. These are know as retirement or pension plans. Some plans are contributory, meaning employees contribute and bear some of the cost of the plan and some plans are non-contributory in which the employer bears all of the costs of the plan.

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Retirement benefits plans usually fall under two general types:

• Defined contribution plans are plans in which the employer agrees to contribute a certain amount each period into a trust for the retirement benefit of the employee to provide retirement income and medical benefits.

• Defined benefit plans are plans in which the employer promises to provide specific amounts of retirement income and possibly other benefits such as medical insurance to employees based on formulas that take into account the employee’s years of service and compensation level.

Retirement benefits plans usually fall under two general types:

• Defined contribution plans are plans in which the employer agrees to contribute a certain amount each period into a trust for the retirement benefit of the employee to provide retirement income and medical benefits.

• Defined benefit plans are plans in which the employer promises to provide specific amounts of retirement income and possibly other benefits such as medical insurance to employees based on formulas that take into account the employee’s years of service and compensation level.

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Every payroll event will involve two categories

of expense, gross earnings and additional

employer payroll expense (taxes &

benefits). The balancing entries for

these expenses will all involve payables.

Objective 12.2: Calculate gross earnings , employee and employer taxes and

deductions

O12.2

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Pay periods• Typical pay periods are: • Biweekly resulting in 26 periods per

year• Semimonthly resulting in 24 periods

per year• Monthly resulting in 12 periods per

year• Weekly resulting in 52 periods per

year

• Typical pay periods are: • Biweekly resulting in 26 periods per

year• Semimonthly resulting in 24 periods

per year• Monthly resulting in 12 periods per

year• Weekly resulting in 52 periods per

year

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Overtime pay

• The Fair Labor Standards Act identifies exempt and nonexempt employees. Exempt employees are exempt from overtime pay rules while nonexempt must be compensated for overtime according to the act.

• The Fair Labor Standards Act identifies exempt and nonexempt employees. Exempt employees are exempt from overtime pay rules while nonexempt must be compensated for overtime according to the act.

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Gross pay calculations

For a salaried employee • Annualize salary if it is not described in

annual terms. • Using the pay period adopted by the firm,

compute regular earnings for the pay period

• Calculate regular hourly wages that result• Compute any overtime if it applies to the

employee (nonexempt)• Add the regular gross and the overtime

pay (if any) to determine the gross earnings for the pay period

For a salaried employee • Annualize salary if it is not described in

annual terms. • Using the pay period adopted by the firm,

compute regular earnings for the pay period

• Calculate regular hourly wages that result• Compute any overtime if it applies to the

employee (nonexempt)• Add the regular gross and the overtime

pay (if any) to determine the gross earnings for the pay period

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Salaried employee

Doris is salaried at $2,600 per month as a nonexempt

employee. The pay period is weekly. Overtime rate is 1.5 times regular hourly rate for

hours in excess of 40 per week. For the week just ending she

worked 43 hours. Compute her gross pay for the week

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Salaried employee

Doris1. Annualize salary: $2,600 x 12 months =

$31,200 annually2. Compute regular earnings: $31,200/52

weeks = $6003. Calculate regular hourly wages:

$600/40 hours = $15 per hour4. Compute overtime: $15 x 1.5 = $22.50 x

(43—40 hours) = $67.505. Add regular gross and overtime pay:

$600 + $67.50 = $667.50 gross earnings

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Gross pay calculations

For a wage earning employee• Based on hourly wage, compute

regular earnings • Compute any overtime if it applies to

this employee and pay period• Add the regular gross and the

overtime pay (if any) to determine the gross earnings for the pay period

For a wage earning employee• Based on hourly wage, compute

regular earnings • Compute any overtime if it applies to

this employee and pay period• Add the regular gross and the

overtime pay (if any) to determine the gross earnings for the pay period

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Wage earner

Jamil earns $14 per hour as a nonexempt employee. The pay

period is weekly. Overtime rate is 1.5 times regular hourly rate for

hours in excess of 40 per week. For the week just ending he worked 45 hours. Compute his gross pay for

the week.

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Wage earner

Jamil1.Compute regular earnings: $14 x

40 hours = $5602.Compute overtime: $14 x 1.5 =

$21 x (45—40 hours) = $1053.Add regular gross and overtime

pay: $560 + $105 = $665 gross earnings

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Gross pay calculationsFor a commissioned salesperson with a base

salary• Annualize salary if it is not described in

annual terms . • Using the pay period adopted by the firm,

compute base earnings for the pay period.• Compute commissions considering the

details of the commission agreement such as quotas or minimums required before commissions are paid.

• Add the base earnings and the commission pay (if any) to determine the gross earnings

For a commissioned salesperson with a base salary

• Annualize salary if it is not described in annual terms .

• Using the pay period adopted by the firm, compute base earnings for the pay period.

• Compute commissions considering the details of the commission agreement such as quotas or minimums required before commissions are paid.

• Add the base earnings and the commission pay (if any) to determine the gross earnings

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Salary with commissions

Hyunok earns a base salary of $1,200 per month as an exempt

employee. The pay period is biweekly. Commissions are paid at the rate of 25% of sales made after a quota of $2,500 in sales per pay period has been achieved. For the

pay period just ending she achieved $3,500 in sales. Compute her gross pay for the pay period.

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Salary with commissions

Hyunok1. Annualize salary: $1,200 x 12 months

= $14,4002. Compute base earnings: $14,400 / 26

periods = $553.85 3. Compute commissions: $3,500—

$2,500 = $1,000 x 25% = $250 4. Add the base earnings and the

commissions: $553.85 + $250 = $803.85 gross earnings.

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Total payroll expenses include the big wheel (gross earnings) plus

the little wheel(additional employer

payroll expenses).

GROSS EARNINGS

EMPLOYER PAYROLL EXPENSE

TOTAL COST OF PAYROLL

Conceptual view of payroll - two categories of expense

O12.2

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Calculation of deductions from employee’s gross earnings

Following are deductions from gross earnings to arrive at net pay. There can be many more, however, these are common to most payroll.

• Federal Income tax• FICA including Social Security and

Medicare• Voluntary deductions such as medical

insurance premiums paid by the employee

Following are deductions from gross earnings to arrive at net pay. There can be many more, however, these are common to most payroll.

• Federal Income tax• FICA including Social Security and

Medicare• Voluntary deductions such as medical

insurance premiums paid by the employee

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Astrid’s gross earnings were $850 for the semimonthly pay period. Her required Federal Income tax

withholding amount for this period is $58 (from tax tables). Her year to date prior earnings are$5,500. Her

share of a voluntary medical insurance premium is $48. Compute her deductions from gross pay and

her net pay for the pay period.

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Astrid1. Federal Income Tax withholding (from IRS

tables): $582. FICA:

1. Social Security 6.2% x $850 = $52.702. Medicare 1.45% x $850 = $12.33;3. Total FICA tax deductions = $52.70 +

$12.33 = $65.033. Voluntary deduction of medical insurance

(given): $48 4. Total deductions $58 +$65.03 + $48 =

$171.035. Net pay = Gross Earnings—Total deductions

= $850 -$171.03 = $678.97

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Calculation of taxes and additional contributions made by the employer

Following are additional payroll taxes and other contributions made by the employer on behalf of the employee. The total of these taxes and contributions plus the gross earnings of the employee There can be many more, however, these are common to most payroll.

Following are additional payroll taxes and other contributions made by the employer on behalf of the employee. The total of these taxes and contributions plus the gross earnings of the employee There can be many more, however, these are common to most payroll.

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• FICA –matches dollar for dollar of amounts withheld from employee’s gross earnings including Social Security and Medicare These taxes are often describe together as FICA taxes.

• FICA –matches dollar for dollar of amounts withheld from employee’s gross earnings including Social Security and Medicare These taxes are often describe together as FICA taxes.

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• FUTA –Federal Unemployment Tax is a net .8% (6.2% - 5.4% credit for state unemployment tax) of taxable earnings up to $7,000 annually.

• SUTA –State Unemployment tax rate varies state by state, however, we will use 5.4% of the first $7,000 of taxable earnings annually.

• FUTA –Federal Unemployment Tax is a net .8% (6.2% - 5.4% credit for state unemployment tax) of taxable earnings up to $7,000 annually.

• SUTA –State Unemployment tax rate varies state by state, however, we will use 5.4% of the first $7,000 of taxable earnings annually.

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• Voluntary deductions such as medical insurance premiums paid by the employer as on behalf of the employee. These deductions vary by firm and by employee.

• Voluntary deductions such as medical insurance premiums paid by the employer as on behalf of the employee. These deductions vary by firm and by employee.

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Astrid’s gross earnings were $850 for the semimonthly pay period. Her

year to date prior earnings are$5,500. The employer’s share of

a voluntary medical insurance premium is $198. FUTA is .8% and

SUTA 5.4% of the first $7,000 annually. Compute the employer’s

payroll taxes and additional deductions for the pay period.

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Astrid

1. FICA: 1. Social Security 6.2% x $850 = $52.702. Medicare 1.45% x $850 = $12.33;3. Total employer FICA taxes = $52.70 + $12.33 =

$65.032. FUTA .8% x $850 = $6.803. SUTA 5.4% x $850 = $45.904. Voluntary deduction of medical insurance (given): $1985. Total additional payroll expenses: FICA = $171.03

+FUTA $6.80 + SUTA $45.90 + medical insurance $198 = $421.73

6. TOTAL cost of payroll: Gross Earnings + Payroll expenses = $850 + $421.73 = $1,271.73

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Caps are maximum earning levels that a particular tax applies to.

For example

The Social Security tax paid by employees is 6.2% (also matched by employer) of earnings up to $90,000. After reaching that total, no additional tax is paid. For Medicare however, there is no cap and the 1.45% Medicare tax (also employer matched) would continue to apply to all earnings regardless of total.When dealing with a cap, you should ask. . .

Caps are maximum earning levels that a particular tax applies to.

For example

The Social Security tax paid by employees is 6.2% (also matched by employer) of earnings up to $90,000. After reaching that total, no additional tax is paid. For Medicare however, there is no cap and the 1.45% Medicare tax (also employer matched) would continue to apply to all earnings regardless of total.When dealing with a cap, you should ask. . .

O12.2

Payroll Caps

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46For this payroll

calculation: Were total YTD earnings

already above the cap before this pay period?

For this payroll calculation: Were total

YTD earnings already above the cap before this pay period?

Yes

No

This tax no longer applies

to this employee this

year.

This tax no longer applies

to this employee this

year.

Will this payroll bring total YTD

earning over the cap?

Will this payroll bring total YTD

earning over the cap?

This tax applies to all of the

earnings for this payroll period for

this employee.

This tax applies to all of the

earnings for this payroll period for

this employee.

Subtract the previous YTD earnings from the cap. This remainder is

the portion of the current payroll that the tax applies to.

Subtract the previous YTD earnings from the cap. This remainder is

the portion of the current payroll that the tax applies to.

YesNo

Payroll Caps

O12.2

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ProfitDebit Credit or

Loss

Expenses

BALANCE SHEET INCOME STATEMENT

Assets Liabilities Revenue

Equity

Page 7

Date Description PR Debit Credit

15-Jun Wages Expense 575 480.00

Wage Payable 230 366.88

FICA (Social Security) Payable 235 36.72

FIT (Fed Inc. Tax withheld) Payable 238 53.40

Medical Insurance Payable 240 23.00

Payroll tax expense 580 181.48


Federal Unemp. Tax Payable (FUTA) 245 3.84

State Unemp. Tax Payable (SUTA) 246 25.92


GENERAL JOURNAL

Journal entries for payroll“Big Wheel”

area

&

“Little Wheel” area

That would be the amount of your “take home” paycheck.

-Look at the total cost to the employer vs take home: $480 +

$181 = $661 cost and the employee takes home $367!

O12.2

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Gross Earnings (Big Wheel)•FIT –Federal Income Tax withheld•FICA –Federal Insurance Contributions Act (Social Security) Two components Social Security and Medicare •Medical Insurance –Employee benefit of medical insurance provided by the employer. Premiums often shared between employer and employee•Wages Payable –Gross earnings minus deductions = net paycheck

Employer Payroll Tax Expense (Little Wheel)•FICA –Same as employees. The employer is required to match dollar for dollar •FUTA –Federal Unemployment Insurance paid by the employer to provide employees with jobless benefits •SUTA –State Unemployment Insurance paid by the employer to provide jobless benefits.

Gross Earnings (Big Wheel)•FIT –Federal Income Tax withheld•FICA –Federal Insurance Contributions Act (Social Security) Two components Social Security and Medicare •Medical Insurance –Employee benefit of medical insurance provided by the employer. Premiums often shared between employer and employee•Wages Payable –Gross earnings minus deductions = net paycheck

Employer Payroll Tax Expense (Little Wheel)•FICA –Same as employees. The employer is required to match dollar for dollar •FUTA –Federal Unemployment Insurance paid by the employer to provide employees with jobless benefits •SUTA –State Unemployment Insurance paid by the employer to provide jobless benefits.

O12.2

Review of definitions-Payroll

Total Cost of Payroll = Gross Earnings + Employer Payroll

Expense

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Payroll calculation example

“Big Wheel” area

&

“Little Wheel” area

O12.2

Rate CapFIT Varies NoneSocial Sec 6.20% 90,000 Employer matchMedicare 1.45% None Employer matchMedical Ins Varies NoneFUTA 0.80% 7,000SUTA 5.40% 7,000

Employee Earnings FITSocial Security Medicare

Medical Insurance

Total Deductions

Wages Payable

Mary ToddYTD 87,000.00 20,880.00 5,394.00 1,261.50 650.00Current 3,450.00 828.00 186.00 50.03 26.00 1,090.03 2,359.97 Total 90,450.00 21,708.00 5,580.00 1,311.53 676.00Joe LincolnYTD 1,250.00 187.50 77.50 18.13 130.00Current 480.00 40.00 29.76 6.96 26.00 102.72 377.28 Total 1,730.00 227.50 107.26 25.09 156.00

EarningsSocial

Security Medicare FUTA SUTAMedical Insurance

Total payroll tax expense

EmployeeMary ToddYTD 87,000.00 5,394.00 1,261.50 56.00 378.00 4,620.00 11,709.50Current 3,450.00 186.00 50.03 0.00 0.00 105.00 341.03 Total 90,450.00 5,580.00 1,311.53 56.00 378.00 4,725.00 12,050.53Joe LincolnYTD 1,250.00 77.50 18.13 10.00 67.50 410.00 583.13Current 480.00 29.76 6.96 3.84 25.92 105.00 171.48 Total 1,730.00 107.26 25.09 13.84 93.42 515.00 754.61

M. Todd 3,791.03J. Lincoln 651.48

Payroll Worksheet

Current Payroll

Current Total = Gross earnings + Payroll tax expense

Gross Earnings

Employer Payroll Expense

FICA

FICA

Rate CapFIT Varies NoneSocial Sec 6.20% 90,000 Employer matchMedicare 1.45% None Employer matchMedical Ins Varies NoneFUTA 0.80% 7,000SUTA 5.40% 7,000

Employee Earnings FITSocial Security Medicare

Medical Insurance

Total Deductions

Wages Payable

Mary ToddYTD 87,000.00 20,880.00 5,394.00 1,261.50 650.00Current 3,450.00 828.00 186.00 50.03 26.00 1,090.03 2,359.97 Total 90,450.00 21,708.00 5,580.00 1,311.53 676.00Joe LincolnYTD 1,250.00 187.50 77.50 18.13 130.00Current 480.00 40.00 29.76 6.96 26.00 102.72 377.28 Total 1,730.00 227.50 107.26 25.09 156.00

EarningsSocial

Security Medicare FUTA SUTAMedical Insurance

Total payroll tax expense

EmployeeMary ToddYTD 87,000.00 5,394.00 1,261.50 56.00 378.00 4,620.00 11,709.50Current 3,450.00 186.00 50.03 0.00 0.00 105.00 341.03 Total 90,450.00 5,580.00 1,311.53 56.00 378.00 4,725.00 12,050.53Joe LincolnYTD 1,250.00 77.50 18.13 10.00 67.50 410.00 583.13Current 480.00 29.76 6.96 3.84 25.92 105.00 171.48 Total 1,730.00 107.26 25.09 13.84 93.42 515.00 754.61

M. Todd 3,791.03J. Lincoln 651.48

Payroll Worksheet

Current Payroll

Current Total = Gross earnings + Payroll tax expense

Gross Earnings

Employer Payroll Expense

FICA

FICA

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Example –Journal entriesPage 7


7-Dec Wages Expense 575 3,930.00

Wage Payable 230 2,737.25


FIT (Fed Inc. Tax withheld) Payable 238 868.00


Payroll expenses 580 512.51


Federal Unemp. Tax Payable (FUTA) 245 3.84

State Unemp. Tax Payable (SUTA) 246 25.92


GENERAL JOURNAL

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Payroll disbursement

Page 7


7-Dec Wage Payable 250 2,737.25

Cash -M. Todd 100 2,359.97

Cash -J . Lincoln 100 377.28

10-Dec FICA Payable 260 545.50

FIT Payable 265 868.00

Cash -Federal Tax Deposit 100 1,413.50


Cash -Medical Insurance Co 100 262.00

31-Jan SUTA Payable 275 135.00

Cash -SUTA Cash Deposit 100 135.00

FUTA Payable 280 22.00

Cash -FUTA Tax Deposit 100 22.00

GENERAL JOURNAL

Here FUTA & SUTA

Deposits include all the fourth

quarter totals.

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