Accounting for Payroll Payroll Taxes and Journal Entries

Accounting for Payroll, Payroll Taxes and Journal Entries

Objectives • Calculate gross payroll using multiple methods • List and compute withholdings • Compute net pay • Prepare payroll register • Explain distribution methods • Record payroll transactions in the general journal • Describe employer’s payroll taxes • Record the payment of tax liabilities in the general journal • Complete payroll tax records

Using a Payroll System pay period The amount of time over which an employee is paid. Weekly Most Pay Periods Are Either: Biweekly Semimonthly Monthly payroll A list of the employees and the payments due to each employee for a specific pay period.

gross earnings The total amount of money an employee earns in a pay period; also called gross pay. salary A fixed amount of money paid to an employee for each pay period. wage An amount of money paid to an employee at a specified rate per hour worked. piece rate A rate of pay based on the number of items produced. commission An amount paid to an employee based on a percentage of the employee’s sales. Categories that determine Gross Earnings Pay Categories Salary Hourly Wage Commission Piece Rate Salary plus Commission or Bonus

Overtime! • The overtime rate was set by the Fair Labor Standards Act of 1938. • Overtime Rate • Pay rate employers are required to pay certain employees covered by state and federal laws; the Fair Labor Standards Act of 1938 sets the rate at 1. 5 times the regular hourly rate after 40 hours per week.

Deductions Federal Income Tax Social Security Tax City and State Income Tax deduction An amount that is subtracted from an employee’s gross earnings.

Withholding Allowances The amount withheld depends on: • An allowance an individual claims on a Form W-4; it is used to calculate the amount of income tax withheld from an employee’s paycheck. Marital Status (as found on W-4) Number of Allowances (as found on W-4) The employees gross earnings

The W-4

Payroll Liabilities and Tax Records • Employers are legally required to make tax deposits on time and to report the earnings of each employee. Employers must pay taxes in addition to the amounts withheld from their employees. This is an expense for the business.

The Vocab • Employee earnings are an operating expense and are often recorded in the Salaries Expense account. • Salaries Expense • The expense account used to record employees’ earnings.

Analyze and Journalize • Each type of payroll liability is recorded in a separate account. Zip’s payroll register in Figure 12 -5 on page 323 is the source document for the payroll.

Posting the Payroll Entry

Posting the Payroll Entry

Payroll Tax Expenses Taxes on Employees’ Wages Include Employer’s FICA Taxes Federal Unemploymen t Tax State Unemploymen t Tax

What are these Taxes • Unemployment Taxes • Taxes collected to provide funds for workers who are temporarily out of work; usually paid only by the employer (FUTA and SUTA). • Federal Unemployment Tax Act (FUTA) • Law that requires employers to pay unemployment taxes to the federal government. • State Unemployment Tax Act (SUTA) • Law that requires employers to pay employment taxes to individual states.

Where to Record the Tax Expense • The payroll taxes are recorded as business expenses in the Payroll Tax Expense account • The Payroll Tax Expense account is used to record the employer’s payroll taxes (FICA, FUTA, SUTA).

What does the General Journal Entry look like?

How about the General Ledger?

Paying Taxes A business makes one payment combining: Social Security and Medicare Taxes (Both Employee and Employer) Employees’ Federal Income Taxes Withheld Businesses can either use form 8109 or file electronically with the Electronic Federal Tax Payment System (EFTPS)

What does it all look like? The biggest part to remember is that this is all coming out of cash when paid. So we will always credit cash in order to decrease the cash in the bank. State FIC A FUTA

How about the General Ledger?

Tax Forms Related to Paying Tax Liabilities Form W-2 Filed Annually Form W-2 Wage and Tax Statement; form Form W-3 Filed Annually Payrollthat summarizes Related Tax an employee’s Form 941 Filed Quarterly earnings and amounts withheld for Form 940 Filed Annually federal, state, and local taxes. Form 940 Form 941 Form W-3 Form that reports Employer’s Quarterly Federal Tax Transmittal of Wage and Tax the employer’s Return; form used to report Statements; summarizes the federal accumulated amounts of FICA and information contained on the unemployment federal income tax withheld from employees’ Forms W-2 and taxes. employees’ earnings for the quarter, accompanies the Forms W-2 sent to as well as FICA tax the federal government.