Employee Earnings and Deductions Chapter 7

Payroll Laws Will knowing about payroll taxes get me more chicks!? In this presentation, we are going to look at some laws affecting employees’ pay deductions. They include: Fair Labor Standards Act Current Tax Payment Act (for Federal Income Tax Withholding) Social Security Act of 1935 (for FICA Taxes) State Unemployment Taxes (SUTA Taxes) Federal Unemployment Tax Act (FUTA Taxes) Workers’ Compensation Laws

Calculating Total Earnings Employees ◦ Hourly – paid only for hours worked ◦ Salaried – paid fixed dollar amount Pay Period ◦ Daily, weekly, biweekly, semimonthly, monthly, quarterly, annually

Gross Earnings Regular earnings + Overtime earnings Fair Labor Standards Act - Hourly employee paid time and a half for any hours worked over 40 in one workweek ◦ Employers must follow if doing business in more than one state Minimum wages are set by Congress or state legislature—whichever is higher. Originally, in 1938, the minimum wage was $0.25 per hour!

Let’s see how overtime is figured: Tom Cruiser earns: 39 hours x $10 regular rate$390 Gweneth Paltree earns: 40 hours x $12 regular rate$ overtime hrs x $18 overtime rate180 $660 Wow, Gwen makes a lot more than Tom…Do you know if she’s single?

Tom Selleck 37 hours x $14 regular rate $518 Steve Martin 40 hours x $12 regular rate$480 8 overtime hrs x $18 overtime rate144 $624 Let’s try another one…

Deductions from Total Earnings Anyone who has ever earned a paycheck has encountered some type of payroll deductions. We are going to look at the most common deductions…

How is Federal Income Tax Withholding determined: W-4 Form – Employee’s Withholding Allowance Certificate ◦ Marital status ◦ Total number of allowances The $ Amount withheld is based on ◦ Employee’s gross earnings for the pay period ◦ Marital status and allowances ◦ Tables in IRS Publication 15 So, when I’m hired, I would tell my employer that I’m married and I have seven kids-Right? Are you looking for work right now? Heck no! I need the time to work on my golf game. I let the wife work…

State Income Tax Withholding Each state has its own laws. Our text assumes a fixed 20% of each employee’s federal income tax deduction.

Other Income Tax Withholding Cities Counties Townships ◦ Have different rates ◦ Employers often don’t withhold ◦ Taxpayers must pay on their own The city of St. Louis has a City Earnings tax! If you work in the City, you have this tax withheld from your paycheck too!

Employee FICA Tax Withholding – Social Security and MedicareTaxes FICA – Federal Insurance Contribution Act Provides for: ◦R◦R etirement for persons over 62 years old ◦M◦M edical benefits for persons over 65 ◦B◦B enefits for disabled persons ◦B◦B enefits for families of deceased workers who were covered by this law Hey Grandma. You got your Soc Sec. check! Let’s go for ice cream!

Employee Withholding – FICA- Social Security Taxes FICA-Social Security consists of two taxes: 1. Old-Age, Survivor’s, and Disability Insurance (OASDI) that is 6.2% of the first $113,700 for each employee. 2. Medicare (HI) - Hospital Insurance that is 1.45% of all earnings for each employee

FICA-Social Security (OASDI) There is a limit on the amount of social security tax each employee must pay per year Maximum dollar amount of earnings that can be taxed is called the wage base: The Social Security rate for 2014 is: = 6.2% of wage base of $113,700 As mentioned on the previous slide….

FICA-Medicare All wages subject to tax!! Rate = 1.45% Covers certain medical expenses after an individual turns 65

Other Withholdings Medical insurance Savings plan Disability insurance Union dues More withholdings? At this rate, I won’t have any paycheck How am I going to pay for my boxing lessons!

Net Pay= Gross earnings -Federal income tax -State income tax -OASDI tax -Medicare tax -Other withholdings Net Pay FICA Taxes

Let’s practice: How much will Alvin Chipmunk take home after working so hard at the present-wrapping factory? Alvin Chipmunk: Gross pay$1, Federal income tax$ FICA-OASDI (6.2%) FICA-Medicare (1.45%)24.51 Total deductions Net pay$1,323.71

Let’s try another one. How much will Angel Jolie take home? Angel Jolie: Gross pay$1, Federal income tax$ FICA-Social Sec. (6.2%)99.20 FICA-Medicare (1.45%)23.20 Total deductions Net pay$1,228.60

Calculating the employer taxes for FICA- Social Security/Medicare, FUTA, SUTA, and workers’ compensation insurance will be covered in the next chapter.. What! My boss has to pay payroll taxes too?! Yes! The employer must pay ½ of your social security and medicare taxes as well as all of the Federal and State Unemployment taxes.

Employer Payroll Taxes Social Security & Medicare – matches employee contribution; both employer and employee pay 6.2% of employee gross wages Unemployment taxes – provide unemployed workers with benefits I love it that my boss has to pay half of my social security and ½ of my medicare tax! He’s such a cheapskate!

FUTA and SUTA FUTA taxes ◦ Federal Unemployment Tax Act ◦ Pay administration costs, not the benefits SUTA taxes ◦ State Unemployment Tax Act ◦ Pay the benefits Yahooo! My boss has to pay unemployment taxes! NOT me!!! I forgot to tell you my name..it’s Homer.

FUTA and SUTA (Unemployment Taxes) FUTA taxes ◦ 6.2% on wages earned by each employee up to wage base limit of $7,000 ◦ Allowable tax credit for SUTA tax up to a maximum of 5.4% ◦ Net FUTA tax rate =.8% (We will use.6%) SUTA taxes ◦ Each state determines wage base limit

Let’s see if we can figure out how much of each employee’s earnings would be subject to Social Security and FUTA and SUTA tax: EmployeeCumulative Earnings Gross Pay (subject to Medicare) Earnings Subject to Soc. Sec. Earnings Subject to FUTA/SUTA Jim Crew$3,500$900 Allen Star6, Dee Taffy7, Totals$1,950 $1,300

Workers’ Compensation Insurance Insures employees against losses due to accidental injury or death while on the job In most states, paid by employer Gross payroll is estimated and rate is calculated for each $100 of weekly payroll

Learning Objective 4 Complete a payroll register

Includes each employee’s Gross earnings Employee withholding taxes Net pay Taxable earnings Cumulative earnings Accounts to be charged A Payroll Register is filled out every time an employer pays its employees So, if my farmer paid me every week, then, he would fill out 52 payroll registers? Yep. That’s right! 52 payroll registers for you and your farm friends…

Payroll Register Includes all employee names and social security numbers

Once the payroll register is complete for the pay period, we use it as the basis for recording the payroll in the journal.. Now, we get to learn how to journalize Wages Expense?! … (How much fun can one class be!) Recording Payroll and Payroll Taxes

Recording Wages Expense Use the Payroll Register for your numbers in the journal entry Wages Payable = net pay Wages Expense = gross salary of all employees Credit “payable” accounts for all of the withheld taxes Here is how you do it…..

Record Wages Expense Jan 15 Wages Expense Employees’ Federal Income Tax Payable Employees’ State Income Tax Payable FICA Taxes Payable (7.65%) Employees’ United Way Payable Wages Payable (Net pay) Payroll register for week ended Jan 14 Here is how you journalize it….. Gross pay (BEFORE deductions) Net pay (AFTER deductions)

Record Payment of Wages When we actually write the payroll checks then….. Jan 15 Wages Payable Cash- Payroll Bank Account Paid wages for week ended Jan 14 Net pay (AFTER deductions)

Maintaining an Employee’ s Individual Earnings Record Don’t forget me! I want to keep track of my earnings too! One for me

An Employee's Individual Earnings Record is different than a Payroll Register: It is a summary of each employee’s ◦E◦E arnings ◦W◦W ithholding taxes ◦N◦N et pay ◦C◦C umulative earnings Used to prepare quarterly and annual payroll tax reports So, I have my very own Employee Earnings Record and so do all of my friends? You catch on fast! Your boss, keeps a separate earnings record for each of you!

End of Chapter 7