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Chapter 11
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Chapter 11

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  1. Chapter 11 Accounting for Payroll: Employee Earnings and Deductions

  2. The Need for Payroll Procedures • Employers must calculate the earnings and deductions of their employees at the end of each payroll period and issue paychecks. • Employers must maintain payroll records and complete payroll reports that are required by federal and state regulations. Chapter 11

  3. Employer/Employee Relationships • Only the employees of a firm are on its payroll. • Employees work under the direct control of an employer on a continuous basis. • An employer is able to tell employees when, how, and where to work. Chapter 11

  4. Independent Contractors • Independent contractors are not employees and are not on the payroll. • They are hired to complete specific tasks, and they determine how the tasks are achieved. • Examples: • architect, certified public accountant, lawyer, computer consultant Chapter 11

  5. Withholding Taxes • Most employers are responsible for withholding (deducting) taxes from the earnings of their employees. • Independent contractors receive a fee for their work and are responsible for paying their own taxes. Chapter 11

  6. Salaried and Hourly Employees • Employees are usually classified as salaried or hourly. • Salaried employees work for a fixed amount (a salary) for a definite period of time (a week, month, or year). • Hourly employees work for a fixed hourly rate, which is often called a wage. Chapter 11

  7. Minimum Wage • The Fair Labor Standards Act, a federal law, established a minimum wage for many employees. This wage is raised from time to time by Congress. • Some states also have a minimum wage, which may exceed the federal minimum wage. Chapter 11

  8. Overtime Pay • The Fair Labor Standards Act (FLSA) also requires overtime pay for certain types of employees. • The overtime rate must be at least one and one-half times the regular hourly rate for any hours worked beyond 40 in a week. Chapter 11

  9. Overtime Pay • The overtime rate is often referred to as time-and-a-half. • Executive, administrative, and professional employees are exempt from the overtime pay provision of the FLSA. Chapter 11

  10. Piece-rate Plan • Some employees (usually factory workers) are paid on a piece-rate plan rather than an hourly basis. • These employees receive a certain amount for each unit they complete. Chapter 11

  11. Piece-rate Plan • Example: • A factory might pay 10 cents for each unit produced. An employee who completes 4,000 units a week would receive a wage of $400 (4,000  $.10). Chapter 11

  12. Gross Earnings • Definition: Earnings of an employee before the employer deducts any taxes and other amounts. • The gross earnings of a salaried employee are a fixed amount for each pay period, such as $600 each week or $1,200 every two weeks. Chapter 11

  13. Gross Earnings • The pay period may be weekly, biweekly (every other week), semimonthly (twice a month), or monthly. • Some salaried employees are entitled to overtime pay. Their overtime pay is added to their regular gross earnings. Chapter 11

  14. Gross Earnings • The gross earnings of an hourly employee are found by multiplying the number of hours worked during the pay period by the employee’s hourly rate. • Hours worked  Rate per hour = Gross Earnings • 40  $12=$480 Chapter 11

  15. Gross Earnings • When an hourly employee works overtime, the • employee’s gross earning are calculated as • follows. • Regular Hours  Regular Rate = Regular Earnings • 40  $12 = $480 • Overtime rate: $12  1.5 = $18 per hour Chapter 11

  16. Gross Earnings • Overtime Hours  Overtime Rate = Overtime Earnings • 5  $18 = $90 • Regular Earnings + Overtime Earnings = Gross Earnings • $480 + $90 = $570 Chapter 11

  17. Payroll Deductions • There are two types of payroll deductions— required deductions and voluntary deductions. • Some deductions are required by law (federal income tax, Social Security taxes, state and local taxes). • Other deductions are voluntary (deductions for insurance, savings bonds, a retirement plan, charitable contributions). Chapter 11

  18. FICA (Social Security) Taxes • Most employees are covered by the Federal Insurance Contributions Act (FICA), which requires they pay taxes to support the federal Social Security system. • There are two FICA taxes. One tax covers the Old-Age, Survivors, and Disability Insurance (OASDI) program. The other tax covers the Hospital Insurance Plan (HI), or Medicare. • Each FICA tax has a different rate. Chapter 11

  19. Calculating FICA Taxes—OASDI • There is a taxable wage base for OASDI. This is the maximum amount of an employee’s gross earnings from which the tax is deducted during a calendar year. • The OASDI taxable wage base and rate are changed from time to time by Congress. We will use $87,000 as the wage base and 6.2% as the rate. Chapter 11

  20. Calculating FICA Taxes—OASDI • At the end of the first weekly pay period of the year, an employee had gross earnings of $500. The OASDI tax on her earnings is calculated as follows. • $500  .062 = $31 Chapter 11

  21. Calculating FICA Taxes—OASDI • Calculating the OASDI tax when an employee reaches the maximum taxable wage base: • Greg Gomez is a sales manager. He is paid $7,500 a month. On December 1, his gross earnings for the year totaled $82,500. • On December 31, he owed OASDI tax on $4,500 of his gross earning of $7,500 for the month of December. Chapter 11

  22. Calculating FICA Taxes—OASDI • OASDI Wage Base – Year-to-Date Earnings = Taxable • Earnings • $87,000 – $82,500 = $4,500 • Taxable Earnings  OASDI Rate = OASDI Tax Owed • $4,500  .062 = $279.00 Chapter 11

  23. Calculating FICA Taxes— HI • There is no taxable wage base for HI. All of an employee’s gross earnings are subject to HI. • The HI rate can be changed by Congress. We will use 1.45%. • For an employee with $500 of gross earnings, the HI tax on her earnings is calculated as follows. • $500  .0145 = $7.25 Chapter 11

  24. Federal Income Tax • The federal income tax withheld depends on three factors: • 1. The amount of an employee’s gross earnings • 2. The employee’s marital status • 3. The number of withholding allowances the employee claims Chapter 11

  25. Federal Income Tax • There are several methods for determining the amount of federal income tax to withhold. One method involves using the wage-bracket tax tables. Chapter 11

  26. Wage-bracket Tax Tables • The Internal Revenue Service provides wage-bracket tax tables for federal income tax in a publication called the Employer’s Tax Guide (Circular E). • The wage-bracket tax tables cover a variety of pay periods—weekly, biweekly, semimonthly, monthly, and so on. • There are separate tax tables for single and married persons. Chapter 11

  27. State and Local Income Taxes • Most states impose an income tax and require employers to withhold this tax from the earnings of their employees. • Some county and city governments also impose an income tax. • The procedures for determining state and local income taxes are similar to those for determining federal income tax. Chapter 11

  28. Calculating Net Earnings • After finding the gross earnings and deductions for an employee, it is necessary to determine the net earnings. This amount is also known as net pay or take-home pay. Chapter 11

  29. Calculating Net Earnings • Gross earnings $500.00 • Less Deductions: • FICA—OASDI $ 31.00 • FICA—HI 7.25 • Federal income tax 42.00 • State income tax 11.00 • Medical insurance 15.00 • Savings bonds 10.00 • Total deductions 116.25 • Net Earnings $383.75 Chapter 11

  30. Payroll Records • Federal, state, and local laws require that employers keep certain types of payroll information. • To satisfy this requirement, most employers use a payroll register and employee earnings records. Chapter 11

  31. Payroll Register • The payroll register contains information about the gross earnings, deductions, and net pay of all employees for a specific payroll period. Chapter 11

  32. Employee Earnings Records • The heading of the employee earnings record shows the employee’s name, address, social security number, job title, starting date, and rate of pay. • The main part of the employee earnings record shows the employee’s gross earnings, deductions, and net pay for each payroll period throughout the year. Chapter 11

  33. Accounting for Payroll • The payroll register and employee earnings records are not part of the accounting system. They are auxiliary records. • At the end of each payroll period, it is necessary to use the totals from the payroll register to make an accounting entry. Chapter 11

  34. Accounting for Payroll • The gross earnings for the period are debited to Salaries Expense, the various deductions are credited to liability accounts, and the net pay is credited to another liability account—Salaries Payable. Chapter 11

  35. Employee Earnings, Deductions, and Net Pay • 20X1 • Jan. 7 Salaries Expense 10,000 • FICA Tax Payable—OASDI 620 • FICA Tax Payable—HI 145 • Federal Income Tax Payable 980 • State Income Tax Payable 225 • Medical Insurance Payable 300 • Savings Bonds Payable 130 • Payroll for week ended Jan. 7 7,600 Chapter 11

  36. Payment of the Payroll • When the payroll is paid, it is necessary to make an accounting entry. This entry consists of a debit to Salaries Payable and a credit to Cash. • 20X1 • Jan. 10 Salaries Payable 7,600 • Cash 7,600 • Paid the payroll of • Jan. 7. Chapter 11