Payroll Accounting 2005 Bernard J. Bieg CHAPTER 6 ANALYZING AND JOURNALIZING PAYROLL TRANSACTIONS Developed by Lisa Swallow, CPA CMA MS

Accounting for Payroll Transactions Payroll requires entering data (in order) in the following places: Payroll Register Employee Earnings Records General Journal journalize wages journalize payroll taxes and workers comp journalize period end accruals Post to General Ledger

*Use payroll register to journalize* Payroll register shows (in rows) by employee: gross wages taxes withheld and other deductions net pay Payroll register shows (in columns) total of gross wages, each deduction and net “Foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number *Use payroll register to journalize*

Employee Earnings Records Employee Earnings Record used to track cumulative totals (wages and taxes) Enter row of data each pay period important because different wage caps for FUTA, SUTA and OASDI taxes need to track cumulative totals in order to issue W-2s and do quarterly SUTA reports prepare various internal and external reports

Two Journal Entries to Record Payroll Number 1 - Record gross wages, withholdings and net pay Number 2 - Record employer payroll tax expense *These two journal entries are always the same in format and you must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example)

Journal Entry #1 Debit Wage Expense for gross payroll Credit each withholding account - they are all liabilities Credit cash (or wages payable) for net payroll Journal entry Wage Expense 1845.00 OASDI Payable 114.39 HI Payable 26.75 FIT Payable 174.00 SIT Payable 50.00 Insurance Payable 191.00 Cash 1,288.86

Journal Entry #2 Debit Payroll Tax Expense for total of all payroll taxes that ER pays Credit each account - they are all liabilities Calculate all employer taxes utilizing varying wage bases and percentages Journal entry Payroll Tax Expense 188.92 FUTA Payable 1.72 SUTA Payable 46.06 OASDI Payable 114.39 HI Payable 26.75

Recording Deposit of Payroll Taxes Look in general ledger, in each applicable liability account, for amount due Deposit 941 taxes Deposit state income tax Deposit SUTA

Workers Compensation Workers compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities laws differ by state premiums are calculated based on employment classification - per $100 of payroll pay premiums in advance based on projected wages then, at year end, report actual wages and pay additional premium or receive credit towards next year

Recording Workers Compensation Debit Work Comp Insurance Expense for premium paid Credit cash (if paying) or insurance payable (if accruing) Journal entry Workers Comp Insurance Expense 99.67 Cash or Insurance Payable 99.67

Journalize Period End Accruals Accrued Wages should be recorded for wages earned by workers but not yet paid (gross) Wage Expense 1589.96 Wages Payable 1589.96 Accrued Vacation Pay should be recorded for amount of vacation pay owed employees Vacation Benefits Expense 520.00 Vacation Benefits Payable 520.00

Other Deductions from Payroll Any deduction that the ER makes from EE paycheck goes into a liability account, because they owe it to someone, such as: Health insurance premiums Purchase EE or HH government bonds Union dues Deferred compensation (contributions to pension plan)

Garnishments A creditor can, through the courts, seek repayment of his/her money by garnishment Employer is required to comply with garnishment order ER must withhold funds from EE’s paycheck and submit it to appropriate authorities Creditor garnishments cannot exceed 25% of disposable income (after tax earnings)

Child Support Family Support Act of 1988 requires immediate withholding for child support payments Maximum amount that can be withheld from a person’s weekly disposable wages varies according to different support orders, but can be as high as 50-65% of disposable earnings

Summary of Accounts Used Account Title Normal Balance Type of Account Wage Expense Debit Expense Payroll Tax Expense Work Comp Insurance Exp Vacation Expense OASDI Payable Credit Liability HI Payable FUTA Payable SUTA Payable

Summary of Accounts Used (Continued) FIT Payable Credit Liability SIT Payable Insurance Payable Union Dues Payable Wages Payable Vacation Benefits Payable