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CHAPTER NINE

This text provides information on employer payroll taxes, including FICA, FUTA, and SUTA, and how they contribute to the cost of having employees. It also covers employer's responsibilities and reporting requirements for these taxes.

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CHAPTER NINE

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  1. CHAPTER NINE PAYROLL ACCOUNTING: EMPLOYER TAXES AND REPORTS

  2. EMPLOYER PAYROLL TAXES • In addition to the gross pay for each employee, the employer must pay payroll taxes: • FICA • FUTA (Federal Unemployment Tax Act) • SUTA (state unemployment tax) • These taxes add substantially to the cost of having employees.

  3. EMPLOYER’S FICA TAXES Both the employee and employer pay FICA taxes. Each pays an equal share. Social Security = 6.2% on maximum earnings of $76,200 The amount of earnings subject to Social Security tax is obtained from the Payroll Register.

  4. PAYROLL REGISTER EARNINGS # MARITAL STATUS REGULAR OVER-TIME TOTAL NAME ALLOW. Cadrain, Sarah M 60.00 1,260.00 4 1,200.00 760.00 S 140.00 900.00 Guder, James 1 M Istone, Ken 6 545.00 545.00 Sarah earned $1,260 this period…. 480.00 294.00 774.00 M Kuzmik, Helen 2 440.00 440.00 M Lee, Hoseoup 3 Swaney, Linda 2 528.00 198.00 S 726.00 Tucci, Paul 5 490.00 M 490.00 S 300.00 Wiles, Harry 1 300.00 4,743.00 5,435.00 692.00

  5. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 43,400.00 900.00 900.00 545.00 27,025.00 545.00 But only $660 of her earnings are below the maximum and therefore subject to Social Security tax. 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  6. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 43,400.00 900.00 900.00 545.00 27,025.00 545.00 This period’s total earnings subject to Social Security tax 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  7. EMPLOYER’S FICA TAXES Social Security Taxable Earnings Tax Rate Tax X $299.77 $4,835 6.2% X $299.77 Withheld from employee $299.77 Paid by employer + $599.54 Total Social Security tax to be paid to the IRS

  8. EMPLOYER’S FICA TAXES Medicare = 1.45% of ALL earnings Tax Total Earnings Tax Rate X $78.81 $5,435 1.45% X $78.81 Withheld from employee $78.81 Paid by employer $157.62 Total Medicare tax to be paid to the IRS

  9. SELF-EMPLOYMENT TAX

  10. SELF-EMPLOYMENT TAX • Paid by individuals who own and run their own businesses • They are both employee and employer. • Taxed at double the FICA rates • i.e., they pay both the employee and employer portions. • Computed on Self-employment Income • Net income of the business

  11. EMPLOYER’S FUTA TAX Federal Unemployment Tax Act levies a tax on employers to raise funds to administer the combined federal/state unemployment compensation program. Tax rate is 6.2% applied to maximum earnings of $7,000; with credits given based on employers’ participation in state unemployment program. Let’s look back at the Payroll Register and determine the FUTA tax owed.

  12. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 Only 1 employee’s earnings is below the $7,000 and therefore subject to FUTA tax 43,400.00 900.00 900.00 545.00 27,025.00 545.00 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  13. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 A credit of 5.4% is granted because this company participates in a state unemployment program. 6.2% - 5.4% = 0.8% FUTA rate 660.00 76,800.00 43,400.00 900.00 900.00 545.00 27,025.00 545.00 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  14. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 43,400.00 900.00 900.00 FUTA tax is $2.40. 0.8% x $300 545.00 27,025.00 545.00 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  15. EMPLOYER’S SUTA TAX • Levied on employers • Commonly 5.4% of $7,000 maximum earnings: • Per employee • Many states have MERIT-RATING system: • Lower rate to employers with few former employees receiving unemployment compensation

  16. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 SUTA tax is $16.20. $300 x 5.4% 43,400.00 900.00 900.00 545.00 27,025.00 545.00 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  17. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 2 A journal entry is needed to record the expense and liabilities of these payroll taxes. 3 4 5 6 7 8 9 10 11

  18. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 Step #1 Obtain taxable earnings amounts from Payroll Register 43,400.00 900.00 900.00 545.00 27,025.00 545.00 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  19. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 Step #2 Compute Social Security tax $4,835 x 6.2% = $299.77 43,400.00 900.00 900.00 545.00 27,025.00 545.00 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  20. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 Step #3 Compute Medicare tax $5,435 x 1.45% = $78.81 43,400.00 900.00 900.00 545.00 27,025.00 545.00 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  21. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 Step #4 Compute FUTA tax $300 x .08% = $2.40 43,400.00 900.00 900.00 545.00 27,025.00 545.00 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  22. PAYROLL REGISTER TAXABLE EARNINGS EARNINGS CUMULATIVE TOTAL UNEMPLOYMENT COMP. SOCIAL SECURITY TOTAL 1,260.00 660.00 76,800.00 Step #5 Compute SUTA tax $300 x 5.4% = $16.20 43,400.00 900.00 900.00 545.00 27,025.00 545.00 774.00 774.00 31,000.00 440.00 22,340.00 440.00 27,500.00 726.00 726.00 25,050.00 490.00 490.00 300.00 300.00 6,300.00 300.00 5,435.00 259,415.00 300.00 4,835.00

  23. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 2 Step #6 Prepare journal entry using the amounts computed in steps 2 - 5 3 4 5 6 7 8 9 10 11

  24. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Dec. 19 Payroll Taxes Expense 397.18 2 Social Security Tax Payable 299.77 3 Medicare Tax Payable 78.81 4 FUTA Tax Payable 2.40 5 SUTA Tax Payable 16.20 6 Payroll Taxes Expense is debited for the total of all employer taxes. ($299.77 + 78.81 + 2.40 + 16.20) 7 8 9 10 11

  25. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Dec. 19 Payroll Taxes Expense 397.18 2 Social Security Tax Payable 299.77 3 Medicare Tax Payable 78.81 4 FUTA Tax Payable 2.40 5 SUTA Tax Payable 16.20 6 Employer payroll taxes for 7 Week ended Dec. 19 8 9 10 11

  26. TOTAL PAYROLL COST OF AN EMPLOYEE Gross Wages $26,000 Let’s look at the total costs of an employee who earns $26,000/year.

  27. TOTAL PAYROLL COST OF AN EMPLOYEE Gross Wages $26,000 Social Security 1,612 $26,000 x 6.2%

  28. TOTAL PAYROLL COST OF AN EMPLOYEE Gross Wages $26,000 Social Security 1,612 Medicare 377 $26,000 x 1.45%

  29. TOTAL PAYROLL COST OF AN EMPLOYEE Gross Wages $26,000 Social Security 1,612 Medicare 377 SUTA 378 $7,000 x 5.4%

  30. TOTAL PAYROLL COST OF AN EMPLOYEE Gross Wages $26,000 Social Security 1,612 Medicare 377 SUTA 378 FUTA 56 $7,000 x 0.8%

  31. TOTAL PAYROLL COST OF AN EMPLOYEE Gross Wages $26,000 Social Security 1,612 Medicare 377 SUTA 378 FUTA 56 $28,423 Total Cost!!

  32. REPORTING AND PAYMENT OF TAXES Determining when payments of Federal Income, Social Security, and Medicare taxes are due: Deposit Amount: Deposit Due: Less than $1,000 at the end of the current quarter End of month following end of quarter $1,000 or more at the end of the current quarter and $50,000 or less in total during the lookback period

  33. LOOKBACK PERIOD The four quarters beginning July 1, two years ago, and ending June 30, one year ago Large amounts of payroll taxes in the “lookback period” require frequent future deposits.

  34. REPORTING AND PAYMENT OF TAXES Determining when payments of Federal Income, Social Security, and Medicare taxes are due: Deposit Amount: Deposit Due: Less than $1,000 at the end of the current quarter End of month following end of quarter Deposit 15 days after the end of the month $1,000 or more at the end of the current quarter and $50,000 or less in total during the lookback period

  35. REPORTING AND PAYMENT OF TAXES Determining when payments of Federal Income, Social Security, and Medicare taxes are due: Deposit Amount: Deposit Due: $500 or more at the end of the current quarter and more than $50,000 in total during the lookback period Deposit every other Wednesday or Friday, depending on day of the week payroll payments are made Deposit by the end of the next banking day $100,000 or more on any day during the current quarter

  36. DEPOSITING PAYROLL TAXES • Deposits may be made using either: • Electronic Federal Tax Payment System (EFTPS) • An electronic funds transfer system • Required for taxpayers who deposited more than $200,000 in the prior year • Form 8109 “Federal Tax Deposit Coupon” • Submitted with deposit made at: • Federal Reserve Bank, or • Other authorized commercial bank

  37. Form 8109 • Includes: • Employer Identification Number (EIN) • Obtained from the IRS • Must be shown on all payroll forms and reports filed with the IRS • Amount of the deposit • Type of tax • Tax period

  38. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 2 3 4 Each deposit requires a journal entry. 5 6 7 8 9 10 11

  39. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Feb. 15 2 3 4 This company’s quarterly payroll taxes exceed $1,000; therefore, the January’s deposit is due on the 15th of February. 5 6 7 8 9 10 11

  40. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Feb. 15 Employee Income Tax Payable 2,526.80 2 Social Security Tax Payable 2,692.48 3 Medicare Tax Payable 631.60 4 5 This payment includes both the employer and employee portions and leaves the liability accounts with zero balances. 6 7 8 9 10 11

  41. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Feb. 15 Employee Income Tax Payable 2,526.80 2 Social Security Tax Payable 2,692.48 3 Medicare Tax Payable 631.60 4 Cash 5,850.88 5 Deposit of employee federal 6 income tax and Social 7 Security and Medicare taxes 8 9 10 11

  42. FORM 941 • “Employer’s Quarterly Federal Tax Return” • Must be filed with IRS at the end of month following each calendar quarter: • Due April 30, July 31, October 31, and January 31 • Reports the following taxes for the quarter: • Employee federal income tax withheld • Employee Social Security & Medicare taxes withheld • Employer Social Security & Medicare taxes

  43. FUTA TAXES • Calculated quarterly • Deposit due end of month following end of quarter • Deposit required only when amount exceeds $100 • If $100 or below, amount is added to the following quarter’s deposit. • using Form 8109 or EFTPS

  44. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Apr. 30 FUTA Tax Payable 408.00 2 Cash 408.00 3 4 FUTA is paid on the first $7,000 of earnings per employee. The first quarter’s deposit is usually the largest. 5 6 7 8 9 10 11

  45. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Apr. 30 FUTA Tax Payable 408.00 2 Cash 408.00 3 Paid federal unemployment 4 tax 5 6 7 8 9 10 11

  46. SUTA TAXES • Usually on a quarterly basis • Forms required vary by state

  47. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Apr. 30 SUTA Tax Payable 2,754.00 2 Cash 2,754.00 3 Paid state unemployment 4 tax 5 6 7 8 9 10 11

  48. WAGE AND TAX STATEMENT W-2 • Given to each employee by January 31: • Shows total amount of wages paid & taxes withheld • Prepared from employee earnings record • Multiple copies prepared: • Copy A - to Social Security Administration • Copy B - to employee for federal income tax return • Copy C - to employee for their own records • Copy D- employer retains for their records • Copy 1 - to state and local tax department • Copy 2 - to employee for state or local tax return

  49. TRANSMITTAL OF WAGE AND TAX STATEMENTW-3 • Sent by employers to Social Security Administration • With Copy A of W-2 • Due by last day of February following end of taxable year • Summarizes employee earnings and tax information

  50. WORKERS’ COMPENSATION INSURANCE • Provides insurance for employees who suffer job-related illness or injury • Required by most states • Employer usually pays entire cost • Rate depends on: • # of employees, riskiness of job, and company’s accident history • Rate is applied to estimated payroll: • Year-end adjustment is made when actual payroll is known

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