GLENCOE / McGraw-Hill

Payroll Computations, Records, and Payment

2.Compute gross earnings of employees. 3.Determine employee deductions for social security tax. 4.Determine employee deductions for Medicare tax. 5.Determine employee deductions for income tax. 6.Enter gross earnings, deductions, and net pay in the payroll register. Calculating Earnings and Taxes Section Objectives

On Line Furnishings imports furniture and novelty items to sell over the Internet. The firm is a sole proprietorship owned and managed by Roberta Rosario. On Line Furnishings has five employees. Payday is each Monday. Meet On Line Furnishings. Page 357

Computing Total Earnings of Employees Page 357

The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings. Hourly rate basis Salary basis Commission basis Piece-rate basis Page 357

Hourly rate basis is a method of paying employees according to a stated rate per hour. ANSWER: QUESTION: What is hourly rate basis? Page 357

Salary basis is a method of paying employees according to an agreed- upon amount for each week, month or other period. ANSWER: QUESTION: What is salary basis? Page 357

Commission basis is a method of paying employees according to a percentage of net sales. ANSWER: QUESTION: What is commission basis? Page 357

Piece-rate basis is a method of paying employees according to the number of units produced. ANSWER: QUESTION: What is piece-rate basis? Page 357

Page 357 Determining Pay for Hourly Employees

Objective 2 Compute gross earnings of employees. Page 358

Determining Pay for Hourly Employees Page 357 Two pieces of data are needed to compute gross pay for hourly rate basis employees:  number of hours worked during the payroll period  rate of pay

Hours Worked Page 358

Hours Worked Many businesses use time clocks for hourly employees. Each employee has a time card and inserts it in the time clock to record the times of arrival and departure. The payroll clerk collects the cards at the end of the week. Page 358

Gross Pay Page 358

Computing Gross Pay Cindy Taylor40 hours X$ 9.00 =$ Bill Turner 40 hours X$ 7.50 =$ Cecilia Lin40 hours X$13.00 =$ The gross pay for hourly employees for the week ended January 6 is determined as follows: Page 358 Total hoursRate of payGross pay

Edward Gallegos earns $8.00 per hour. He worked 45 hours. He is paid 40 hours regular rate of pay and 5 hours at time and a half. Therefore, Gallegos’s gross pay adds up to: Page 358 Overtime Regular earnings: 40 hours X $ 8.00 $ = = Overtime earnings: 5 hours X $12.00 $ Gross Pay $380.00

Withholdings for Hourly Employees Required by Law Page 358

Withholdings for Hourly Employees Required by Law Page 358 FICA (social security) tax Medicare tax Federal income tax withholding Recall that federal law requires employers to make three deductions from employees’ gross pay:

Objective 3 Determine employee deductions for social security tax. Page 359

Tax-exempt wages are earnings in excess of the base amount set by the Social Security Act. ANSWER: QUESTION: What are tax-exempt wages? Page 359

Earnings in excess of the base amount ($76,200 as of 2000) are not subject to FICA withholding. If an employee works for more than one employer during the year, the FICA tax is deducted and matched by each employer. When the employee files a federal income tax return, any excess FICA tax withheld from the employee’s earnings is refunded by the government or is applied to payment of the employee’s federal income taxes. Tax-exempt Wages Page 359

To determine the amount of social security tax to withhold, multiply the taxable wages by the social security tax rate and round off to the nearest cent. Social Security Tax Cindy Taylor $ X 6.2% =$22.32 Edward Gallegos X 6.2% = Bill Turner X 6.2% = Cecilia Lin X 6.2% = EmployeeGross payTax rate Tax Total social security tax$96.72 Page 359

Objective 4 Determine employee deductions for Medicare tax. Page 359

To compute the Medicare tax to withhold from the employee’s paycheck, multiply the wages by the Medicare tax rate, 1.45 percent. Medicare Tax Cindy Taylor $ X 1.45% = $ 5.22 Edward Gallegos X 1.45% = $ 5.51 Bill Turner X 1.45% = $ 4.35 Cecilia Lin X 1.45% = $ 7.54 EmployeeGross payTax rate Tax Total Medicare tax $22.62 Page 359

Objective 5 Determine employee deductions for income tax. Page 359

The amount of federal income tax to withhold from an employee’s earnings depends on the: Earnings during the pay period Length of the pay period Marital status Number of withholding allowances Page 360

The taxpayer A spouse who does not also claim an allowance Each dependent for whom the taxpayer provides more than half the support during the year Withholding Allowances As the number of withholding allowances increases, the amount of federal income tax withheld decreases. In the simplest circumstances, a taxpayer claims a withholding allowance for: Page 360

The Employee’s Withholding Allowance Certificate, Form W-4 is a form used to claim exemption (withholding) allowances. ANSWER: QUESTION: What is the Employee’s Withholding Allowance Certificate, Form W-4? Page 360

The wage-bracket table method is a simple method to determine the amount of federal income tax to be withheld using tables provided by the government. ANSWER: QUESTION: What is the wage-bracket table method? Page 361

Page 361 The wage-bracket table method is the most common way to compute the federal income tax withholding. The wage-bracket tables are in Publication 15, Circular E. Computing Federal Income Tax Withholding

Use the following steps to determine the amount to withhold: Page 361 Wage-Bracket Table Method 1.Choose the table for the pay period and the employee’s marital status. 2.Find the row in the table that matches the wages earned. Find the column that matches the number of withholding allowances claimed on Form W-4. The income tax to withhold is the intersection of the row and the column.

2.Find the line covering wages between $520 and $530. Cecilia Lin is married, claims two withholding allowances, and earned $520 for the week. Page Go to the table for married persons paid weekly. The tax to withhold is $44; this is where the row and column intersect. Find the column for two withholding allowances.

Other Deductions Required by Law Page 361 Most states and some local governments require employers to withhold state and local income taxes from earnings. In some states employers are also required to withhold unemployment tax or disability tax. The procedures are similar to those for federal income tax withholding. Apply the tax rate to the earnings, or use withholding tables.

Withholdings Not Required by Law Page 361

Some examples are: Group life insurance Group medical insurance Company retirement plans Bank or credit union savings plans or loan repayments United States savings bonds purchase plans Stocks and other investment purchase plans Employer loan repayments Union dues Page 361 There are many payroll deductions not required by law but made by agreement between the employee and the employer.

Determining Pay for Salaried Employees Page 364

The office clerk at On Line Furnishings earns a weekly salary. Page 364 A salaried employee earns a specific sum of money for each payroll period.

Page 364 Hours Worked

Salaried workers who do not hold supervisory jobs are covered by the provisions of the Wage and Hour Law that deal with maximum hours and overtime premium pay. Salaried employees who hold supervisory or managerial positions are called exempt employees. Page 364

Exempt employees are salaried employees who hold supervisory or managerial positions who are not subject to the maximum hour and overtime pay provisions of the Wage and Hour Law. ANSWER: QUESTION: Who are exempt employees? Page 364

Gross Earnings Page 364

Withholdings for Salaried Employees Required by Law Page 364

The procedures for withholding taxes for salaried employees is the same as withholding for hourly employees. Page 364 Apply the tax rate to the earnings or use withholding tables.

Recording Payroll Information for Employees Page 365

Objective 6 Enter gross earnings, deductions, and net pay in the payroll register. Page 365

A payroll register is a record of payroll information for each employee for the pay period. ANSWER: QUESTION: What is a payroll register? Page 365

Completing the Payroll Register PAYROLL REGISTER WEEK BEGINNING January 1, 20-- NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW. STATUS EARNINGS HRS. Taylor, Cindy 1 M Gallegos, Edward 1 S Turner, Bill 3 S Lin, Cecilia 2 M Anderson, Selena 1 S (A) (B) (C) (D) (E) Enter the employee’s name (Column A), number of withholding allowances and marital status (Column B), and rate of pay (Column E). Page 365

PAYROLL REGISTER WEEK BEGINNING January 1, 20-- NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW. STATUS EARNINGS HRS. Taylor, Cindy 1 M Gallegos, Edward 1 S Turner, Bill 3 S Lin, Cecilia 2 M Anderson, Selena 1 S (A) (B) (C) (D) (E) Completing the Payroll Register The Cumulative Earnings column (Column C) shows the total earnings for the calendar year before the current pay period. Since this is the first payroll period for the year, there are no cumulative earnings prior to the current pay period. Page 365

PAYROLL REGISTER WEEK BEGINNING January 1, 20-- NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW. STATUS EARNINGS HRS. Taylor, Cindy 1 M Gallegos, Edward 1 S Turner, Bill 3 S Lin, Cecilia 2 M Anderson, Selena 1 S (A) (B) (C) (D) (E) Completing the Payroll Register In Column D enter the total number of hours worked in the current period. This data comes from the weekly time sheets. Note that all employees were paid for eight hours on January 1, a holiday. Page 365

Completing the Payroll Register Using the hours worked and the pay rate, calculate regular pay (Column F), the overtime premium (Column G), and gross pay (Column H). PAYROLL REGISTER WEEK BEGINNING January 1, 20-- EARNINGS NAME REGULAR OVERTIME GROSS CUMULATIVE PREMIUM AMOUNT EARNINGS Taylor, Cindy Gallegos, Edward Turner, Bill Lin, Cecilia Anderson, Selena , , , (A) (F) (G) (H) (I) Page 365

PAYROLL REGISTER WEEK BEGINNING January 1, 20-- EARNINGS NAME REGULAR OVERTIME GROSS CUMULATIVE PREMIUM AMOUNT EARNINGS Taylor, Cindy Gallegos, Edward Turner, Bill Lin, Cecilia Anderson, Selena , , , (A) (F) (G) (H) (I) Completing the Payroll Register Calculate the cumulative earnings after this pay period (Column I). Page 365

AND ENDING January 6, 20-- PAID January 8, 20-- TAXABLE WAGES DEDUCTIONS NAME SOCIAL MEDICARE FUTA SOCIAL MEDICARE SECURITY SECURITY Taylor, Cindy Gallegos, Edward Turner, Bill Lin, Cecilia Anderson, Selena , , , (A) (J) (K) (L) (M) (N) Completing the Payroll Register The Taxable Wages columns shows the earnings subject to taxes for social security (Column J), Medicare (Column K), and FUTA (Column L). Only the earnings at or under the earnings limit are included in these columns. Page 365

Completing the Payroll Register The Deductions columns show the withholding for social security tax (Column M), Medicare tax (Column N), federal income tax (Column O), and medical insurance (Column P). Page 366 AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS NAME SOCIAL MEDICARE INCOME HEALTH SECURITY TAX INSURANCE Taylor, Cindy Gallegos, Edward Turner, Bill Lin, Cecilia Anderson, Selena (A) (M) (N) (O) (P)

Completing the Payroll Register Subtract the deductions (Columns M, N, O, and P) from the gross earnings (Column H). Enter the results in the Net Amount column (Column Q). This is the amount paid to each employee. AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO. SALARIES WAGES Taylor, Cindy Gallegos, Edward Turner, Bill Lin, Cecilia Anderson, Selena , , (A) (O) (P) (Q) (R) (S) (T) Page 366

AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO. SALARIES WAGES Taylor, Cindy Gallegos, Edward Turner, Bill Lin, Cecilia Anderson, Selena , , (A) (O) (P) (Q) (R) (S) (T) Completing the Payroll Register Enter the check number in Column R. Page 366

AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO. SALARIES WAGES Taylor, Cindy Gallegos, Edward Turner, Bill Lin, Cecilia Anderson, Selena , , (A) (O) (P) (Q) (R) (S) (T) Completing the Payroll Register The payroll register’s last two columns classify employee earnings as office salaries (Column S) or shipping wages (Column T). Page 366

The Payroll Register When the payroll data for all employees has been entered in the payroll register, total the columns. Page 366

REVIEWREVIEW The two pieces of data needed to compute _________ for hourly rate basis employees are the number of hours worked during the payroll period, and the rate of pay. __________ wages are earnings in excess of the base amount set by the Social Security Act. The _______________________________ __________________ is a form used to claim exemption (withholding) allowances. Tax-exempt gross pay Complete the following sentences: Employee’s Withholding Allowance Certificate, Form W-4

REVIEWREVIEW As the number of withholding allowances increases, the amount of federal tax withheld _________. The _________________ method is a simple method to determine the amount of federal income tax to be withheld using the tables provided by the government. The _____________ is a record of payroll information for each employee for the pay period. payroll register wage-bracket table decreases Complete the following sentences:

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