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Payroll Liabilities and Tax Records

Learn about payroll deductions, journalizing payroll entries, and analyzing payroll transactions. Understand employer taxes and liabilities. Prepare payroll tax reports.

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Payroll Liabilities and Tax Records

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  1. Chapter 13 $ Payroll Liabilities and Tax Records $ Making Accounting Relevant Federal, state, and local governments pass tax laws in order to generate revenue for government services. $ $ Can you name some uses for your tax dollars?

  2. Chapter 13 $ JOURNALIZING AND POSTING PAYROLL $ • What You’ll Learn • How to compute the business payroll deductions. • How to record the payroll entry in the general journal. $ $

  3. Chapter 13 $ Payroll Basics • Employees, ranging from design engineers at Ford Motor Company to the waitresses at a neighborhood coffee shop, expect their payroll checks to arrive on time and be accurate! • Employee earnings are a normal operating expense of every business. $ $ $

  4. Chapter 13 $ Analyzing the Payroll Transaction • The business has to keep accurate payroll records. Therefore, JOURNAL ENTRIES summarizing all of the payroll details must be recorded each pay period. • First let’s look at the debit! • The total earnings of all of your employees are recorded under an account called Salaries Expense. $ $ $

  5. Chapter 13 $ Analyzing the Payroll Transaction $ • What about the credits? • Various deductions, such as income and FICA taxes, are withheld from gross earnings each pay period. • The employer retains the amounts withheld until it is time to pay the appropriate government agencies and businesses. • The amounts withheld but not yet paid are the liabilities, or the amounts owed, of a business. Each part of the payroll liabilities are recorded in their own separateaccount. • Liabilities all have normal credit balances. $ $

  6. Chapter 13 $ Journalizing the Payroll $ JOURNAL ENTRY $ $

  7. Chapter 13 $ Does the employer owe taxes too? $ • YES, THEY DO! • In ADDITION to the amounts withheld from employees’ payroll checks, the employerowes taxes based on the weekly payroll. • These taxes are also liabilities of the business. $ $

  8. Chapter 13 $ The Employer’s FICA Taxes • The current rates are 6.2% for social security tax and 1.45% for Medicare tax. • The employer and the employee pay social security tax on gross earnings up to the maximum taxable limit per employee. • The employer and the employee pay Medicare tax on all gross earnings; there is no maximum taxable limit. $ $ $

  9. Chapter 13 $ Federal and State Unemployment Taxes • The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) require employers to pay federal and state unemployment taxes. • The maximum federal unemployment tax is 6.2% on the first $7,000 of an employee’s annual wages. • State unemployment tax rates and maximum taxable amounts vary among states. $ $ $

  10. Chapter 13 $ Journalizing the Employer’s Payroll Taxes • The employer’s payroll taxes are business expenses recorded in the Payroll Tax Expense account. • Use the Social Security Tax Payable and the Medicare Tax Payable accounts to record both the employees’ and the employer’s FICA taxes. • Record the employer’s unemployment taxes in the Federal Unemployment Tax Payable and State Unemployment Tax Payable accounts. $ $ $

  11. Chapter 13 $ Journalizing the Employer’s Payroll Taxes (cont'd.) $ JOURNAL ENTRY $ $

  12. Chapter 13 $ Paying the Payroll Tax Liabilities Business owners mustpaytheirpayrollliabilitiesandfilepayrolltaxreportspromptlyandaccurately. $ $ $

  13. Chapter 13 $ FICA and Federal Income Taxes One payment is made for: $ • Social Security and Medicare taxes (both the employees’ and the employer’s shares) and • employees’ federal income taxes withheld. The Federal Tax Deposit Coupon (Form 8109) is prepared and sent with the check. The form identifies the type of tax and the tax period. • Separate payments and journal entries are used to record the other payroll taxes. $ $

  14. Chapter 13 $ Payment of Federal Payroll Tax Liabilities $ JOURNAL ENTRY $ $

  15. Chapter 13 $ Payment of State Income Taxes $ JOURNAL ENTRY $ $

  16. Chapter 13 $ Payment of Federal Unemployment Taxes $ JOURNAL ENTRY $ $

  17. Chapter 13 $ Payment of State Unemployment Taxes $ JOURNAL ENTRY $ $

  18. Chapter 13 $ Payment of Other Payroll Liabilities For example: • insurance premiums • union dues • charitable contributions $ $ JOURNAL ENTRY $

  19. Chapter 13 $ Preparing Payroll Tax Reports • Forms that employers must complete: • Form W-2 summarizes an employee’s earnings and withholdings for the calendar year. • Employees must receive these by January 31 of the following year. • Form 940 is used to report the employer’s unemployment (state and federal) taxes. • Form 941 is the employer’s quarterly federal tax return on which accumulated amounts of FICA and federal income tax withheld from employees’ earnings, as well as FICA tax owned by the employer, are reported. $ $ $

  20. Chapter 13 $ • Transmittal of Wage and Tax Statements • Employers must file a Form W-3 with the federal government by February 28. • This form summarizes the information contained on the employees’ W-2. $ $ $

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