ANALYZING JOURNALIZING PAYROLL TRANSACTIONS

1. CHAPTER 6 ANALYZING & JOURNALIZING PAYROLL TRANSACTIONS

2. Learning Objectives Record payrolls in appropriate records Understand various deductions taken from employees’ gross pay Journalize entries to record payroll Post to general ledger Explain recording of payroll tax deposits Understand need for end-of-period adjustments

3. Accounting for Payroll Transactions Payroll requires entering data (in order) in the following places: Payroll Register Employee Earnings Records General Journal Journalize gross wages and withholdings Journalize payroll taxes and workers’ compensation Journalize period-end accruals Post to General Ledger

4. Payroll Register First – record info in payroll register Lists employees in rows and shows following information for each Gross wages Taxes withheld and other deductions Net pay Payroll register shows (in columns) Total of gross wages, each deduction and net When completed, should “foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number *Use payroll register to journalize*

5. Employee’s Earnings Record Second – transfer info to employees’ earnings records Used to track cumulative totals (wages and taxes) Enter row of data for each pay period Important because different wage caps for FUTA, SUTA and OASDI taxes Need to track cumulative totals in order to issue W-2s and do quarterly SUTA reports Used to prepare payroll analyses - various internal and external reports Might be used to settle employee grievances

6. Recording Gross Payroll & Withholdings Third - enter information into accounting system Gross payroll is debited Each withholding tax is a liability All other payroll deductions are liabilities as well

7. Recording Gross Payroll & Withholdings Any deduction that the employer makes from employee’s paycheck goes into a liability account (because they owe it to someone) such as: Group life insurance premiums Health insurance premiums Purchase government savings bonds Union dues Deferred compensation (contributions to pension plan) Child support/other garnishments

8. Garnishments A creditor can, through the courts, seek repayment of his/her money by garnishment Employer is required to comply with garnishment order Employer must withhold funds from employee’s paycheck and submit it to appropriate authorities Garnishments limited based upon Consumer Credit Protection Act (CCPA) and vary for Child support (see next slide) Creditors Administrative wages Student loans Note: Chapter13 bankruptcy orders have highest priority over all other claims

9. Child Support Family Support Act requires immediate withholding for child-support payments Child support takes precedence over most deductions Employer can withhold a state mandated fee for administration Some states now require electronic submission of garnished child support payments Maximum amount that can be withheld from a person’s weekly disposable earnings varies according to different support orders, but can be as high as 55-65% of disposable earnings

10. Federal Tax Levy Take second priority after wages withheld for child support (if received prior to tax levy) These levies are suspended if debtor declares bankruptcy Amount of taxpayer’s standard deduction is only amount that is exempt from a federal tax levy $5,800 for single and $11,600 for married IRS publishes tables that can be used to figure amount exempt from tax levies Employer required to withhold until Form 668-D (Release of Levy/Release of Property from Levy) received

11. Pension & Retirement Contributions Pension plans that involve employee contributions result in liability for the employer Recorded in payroll entry Pension Protection Act of 2006 gives company ability to automatically enroll employees in company’s plan and deduct contributions from pay

12. Methods of Paying Wages & Salaries Check Sometimes separate payroll account maintained to make bank reconciliation process easier Electronic payment methods EFTS (electronic funds transfer system) Electronic records created showing bank, account # and net pay Pay cards allow employer to deposit payroll into prepaid card Card utilized like debit or credit card Many employees who do not have bank accounts use these Final pay Many states set time limit between termination and final wage pay out (depends upon whether worker left voluntarily) CA and MI require immediate payment if employee is fired

13. Journal Entries to Record Payroll Journal Entry #1 - Record gross wages, withholdings and net pay Journal Entry #2 - Record employer’s payroll tax expense These two journal entries are always the same in format. You must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example).

14. Journal Entry #1 Debit Wage Expense for gross payroll Credit each withholding account - they are all liabilities Credit cash (or wages payable) for net payroll

15. Journal Entry #2 Debit Payroll Tax Expense for total of all payroll taxes that employer pays Credit each account - they are all liabilities

16. Recording Deposit of Payroll Taxes Look in general ledger for amounts due Deposit 941 taxes Deposit state income tax Deposit SUTA

17. Workers’ Compensation Insurance Workers’ compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities Laws differ by state Premiums often calculated based on employment classification – stated in terms of $100 per payroll Pay premiums in advance based on projected wages Then, at year-end, report actual wages and pay additional premium or may receive credit towards next year

18. Journal Entry for Workers’ Compensation

19. Journalize Period-End Accruals Accrued wages should be recorded for wages earned by workers, but not yet paid Journal entry Wage Expense 1,589.96 Wages Payable 1,589.96 Accrued vacation pay should be recorded for amount of vacation pay owed employees - many employers now merging sick time and vacation time Journal entry Vacation Benefits Expense 520.00 Vacation Benefits Payable 520.00 Note: Not necessary to accrue payroll tax expense at year-end