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Payroll

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Payroll

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  1. Payroll 12 For example: Wages Payable, FICA Payable • Learning Objectives • Explain payroll concepts and terminology • Calculate gross earnings , employee and employer taxes and deductions • Prepare and record payroll

  2. 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. Objective 12.1: Explain payroll concepts and terminology O12.1

  3. 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. Legislation

  4. 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. Legislation

  5. 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). Legislation

  6. Federal 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 Legislation

  7. Unemployment Tax Acts -the federal act was passed in 1935 and state laws followed. Legislation

  8. 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. Legislation

  9. 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. Employee compensation

  10. 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) Employee or Contractor

  11. 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). Payroll terminology

  12. 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. Payroll terminology

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

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

  15. Voluntary\other deductions Retirement contributions Charitable contributions Union dues Savings plans Payroll terminology

  16. Involuntary deductions Garnishments -payments to creditors ordered by the court Child Support payments Payroll terminology

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

  18. FICA –Same dollar amount as paid by employees. The employer is required to match dollar for dollar all FICA taxes paid by the employee. Payroll Expenses Funded by the Employer

  19. 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. Payroll Expenses Funded by the Employer

  20. 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. Payroll Expenses Funded by the Employer

  21. 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. Payroll Expenses Funded by the Employer

  22. Retirement benefitsplans 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. Payroll Expenses Funded by the Employer

  23. Objective 12.2: Calculate gross earnings , employee and employer taxes and deductions 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. O12.2

  24. 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 Pay periods

  25. 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. Overtime pay

  26. 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 Gross pay calculations

  27. 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

  28. Salaried employee • Doris • Annualize salary: $2,600 x 12 months = $31,200 annually • Compute regular earnings: $31,200/52 weeks = $600 • Calculate regular hourly wages: $600/40 hours = $15 per hour • Compute overtime: $15 x 1.5 = $22.50 x (43—40 hours) = $67.50 • Add regular gross and overtime pay: $600 + $67.50 = $667.50 gross earnings

  29. 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 Gross pay calculations

  30. 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.

  31. Wage earner • Jamil • Compute regular earnings: $14 x 40 hours = $560 • Compute overtime: $14 x 1.5 = $21 x (45—40 hours) = $105 • Add regular gross and overtime pay: $560 + $105 = $665 gross earnings

  32. 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 Gross pay calculations

  33. 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.

  34. Salary with commissions • Hyunok • Annualize salary: $1,200 x 12 months = $14,400 • Compute base earnings: $14,400 / 26 periods = $553.85 • Compute commissions: $3,500—$2,500 = $1,000 x 25% = $250 • Add the base earnings and the commissions: $553.85 + $250 = $803.85 gross earnings.

  35. Conceptual view of payroll - two categories of expense Total payroll expenses include the big wheel (gross earnings) plus the little wheel (additional employer payroll expenses). Medical Net Paycheck FIT FICA FUTA FICA Medical SUTA EMPLOYERPAYROLL EXPENSE GROSS EARNINGS TOTAL COST OF PAYROLL O12.2

  36. 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 Calculation of deductions from employee’s gross earnings

  37. Calculation of deductions from employee’s gross earnings 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.

  38. Calculation of deductions from employee’s gross earnings • Astrid • Federal Income Tax withholding (from IRS tables): $58 • FICA: • Social Security 6.2% x $850 = $52.70 • Medicare 1.45% x $850 = $12.33; • Total FICA tax deductions = $52.70 + $12.33 = $65.03 • Voluntary deduction of medical insurance (given): $48 • Total deductions $58 +$65.03 + $48 = $171.03 • Net pay = Gross Earnings—Total deductions = $850 -$171.03 = $678.97

  39.  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. Calculation of taxes and additional contributions made by the employer

  40.  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. Calculation of taxes and additional contributions made by the employer

  41. 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. Calculation of taxes and additional contributions made by the employer

  42. 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. Calculation of taxes and additional contributions made by the employer

  43. Calculation of taxes and additional contributions made by the employer 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.

  44. Calculation of taxes and additional contributions made by the employer • Astrid • FICA: • Social Security 6.2% x $850 = $52.70 • Medicare 1.45% x $850 = $12.33; • Total employer FICA taxes = $52.70 + $12.33 = $65.03 • FUTA .8% x $850 = $6.80 • SUTA 5.4% x $850 = $45.90 • Voluntary deduction of medical insurance (given): $198 • Total additional payroll expenses: FICA = $171.03 +FUTA $6.80 + SUTA $45.90 + medical insurance $198 = $421.73 • TOTAL cost of payroll: Gross Earnings + Payroll expenses = $850 + $421.73 = $1,271.73

  45. Payroll Caps • 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

  46. Payroll Caps 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. 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. Subtract the previous YTD earnings from the cap. This remainder is the portion of the current payroll that the tax applies to. No Yes O12.2

  47. Objective 12.3: Prepare and record payroll Current Liabilities O12.3

  48. 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

  49. Review of definitions-Payroll • 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. Total Cost of Payroll = Gross Earnings + Employer Payroll Expense O12.2

  50. Payroll calculation example “Big Wheel” area & “Little Wheel” area O12.2