Appendix D 1

Appendix D 2 Payroll Accounting Financial Accounting, Seventh Edition Appendix D

Appendix D Discuss the objectives of internal control for payroll Compute and record the payroll for a pay period Describe and record employer payroll taxes. Study Objectives

Appendix D 4 The term “payroll” pertains to both: Salaries - managerial, administrative, and sales personnel (monthly or yearly rate). Wages - store clerks, factory employees, and manual laborers (rate per hour). Payroll Accounting Determining the payroll involves computing three amounts: (1)gross earnings, (2) payroll deductions, and (3) net pay.

Appendix D 5 As applied to payroll, the objectives of internal control are: 1. to safeguard company assets against unauthorized payments of payrolls, and 2. to ensure the accuracy and reliability of the accounting records pertaining to payrolls. SO 1 Discuss the objectives of internal control for payroll. Internal Control for Payroll

Appendix D 6 Internal control feature: Human Resources department documents and authorizes employment. Fraud prevented: Fictitious employees being added to payroll. SO 1 Discuss the objectives of internal control for payroll. Internal Control for Payroll

Appendix D 7 Internal control feature: Supervisors monitor hours worked through time cards and time reports. Fraud prevented: Employee paid for hours not worked. SO 1 Discuss the objectives of internal control for payroll. Internal Control for Payroll

Appendix D 8 Internal control feature: Two (or more) employees verify payroll amounts; supervisor approves. Fraud prevented: Payroll calculation errors and inappropriate amounts being paid to an employee. SO 1 Discuss the objectives of internal control for payroll. Internal Control for Payroll

Appendix D 9 Internal control feature: Treasurer signs and distributes prenumbered checks. Fraud prevented: Checks lost through theft; falsely endorsed used to pay for hours not worked. SO 1 Discuss the objectives of internal control for payroll. Internal Control for Payroll

Appendix D 10 Total compensation earned by an employee (wages or salaries, plus any bonuses and commissions). Gross Earnings SO 2 Compute and record the payroll for a pay period. Determining the Payroll Illustration D-3

Appendix D 11 Mandatory: FICA taxes Federal income tax State income tax Payroll Deductions SO 2 Compute and record the payroll for a pay period. Determining the Payroll Voluntary: Charity Retirement Union dues Health and life insurance Pension plans

Appendix D 12 Mandatory: FICA taxes Federal income tax State income tax Payroll Deductions SO 2 Compute and record the payroll for a pay period. Determining the Payroll Social Security taxes  Supplemental retirement, employment disability, and medical benefits.  In 2009, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $106,800 of gross earnings for each employee.

Appendix D 13 Mandatory: FICA taxes Federal income tax State income tax Payroll Deductions SO 2 Compute and record the payroll for a pay period. Determining the Payroll  Employers are required to withhold income taxes from employees pay.  Withholding amounts are based on gross wages and the number of allowances claimed.

Appendix D 14 Employee must complete an Employee’s Withholding Allowance Certificate (Form W-4). SO 2 Compute and record the payroll for a pay period. Determining the Payroll Illustration D-5

Appendix D 15 Mandatory: FICA taxes Federal income tax State income tax Payroll Deductions SO 2 Compute and record the payroll for a pay period. Determining the Payroll  Most states (and some cities) require employers to withhold income taxes from employees’ earnings.

Appendix D 16 Gross earnings minus payroll deductions. Net Pay SO 2 Compute and record the payroll for a pay period. Determining the Payroll Illustration D-7

Appendix D 17 Employer required by law to keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year. Maintaining Payroll Department Records SO 2 Compute and record the payroll for a pay period. Recording the Payroll Illustration D-8 Employee earnings record

Appendix D 18 Employer required by law to keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year. Maintaining Payroll Department Records SO 2 Compute and record the payroll for a pay period. Recording the Payroll Illustration D-9 Payroll register

Appendix D 19 Exercise: Sandy Teter’s regular hourly wage rate is $16, and she receives an 1 ½ hourly rate of $24 for work in excess of 40 hours. During a January pay period, Sandy works 45 hours. Sandy’s federal income tax withholding is $95, and she has no voluntary deductions. Utilize 8% for FICA taxes withheld. Instructions: Compute Sandy Teter’s gross earnings and net pay for the pay period. Recognizing Payroll Expenses and Liabilities SO 2 Compute and record the payroll for a pay period. Recording the Payroll

Appendix D 20 Exercise: Compute Sandy Teter’s gross earnings and net pay for the pay period. SO 2 Compute and record the payroll for a pay period. Recording the Payroll Gross earnings – Regular pay$ Overtime pay120.00$ Gross earnings$ Less:FICA taxes payable ($760 × 8%)(60.80) Federal income taxes payable (95.00) Net pay $604.20

Appendix D 21 Using the facts from the previous Exercise. Recording Payment of the Payroll SO 2 Compute and record the payroll for a pay period. Recording the Payroll Wages Payable Cash604.20

Appendix D 22 SO 2 Compute and record the payroll for a pay period. Recording the Payroll – An example of a tax table Federal income tax withholding for Married, Weekly, $650 ~ $660, 3 allowances Illustration D-6

Appendix D 23 Payroll tax expense results from three taxes that governmental agencies levy on employers. SO 3 Describe and record employer payroll taxes. Employer Payroll Taxes These taxes are: FICA taxes Federal unemployment tax State unemployment tax  Same rate and maximum earnings as the employee’s.  In 2009, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $106,800 of gross earnings for each employee.

Appendix D 24 Payroll tax expense results from three taxes that governmental agencies levy on employers. SO 3 Describe and record employer payroll taxes. Employer Payroll Taxes These taxes are: FICA taxes Federal unemployment tax State unemployment tax  FUTA tax rate is 6.2% of first $7,000 of taxable wages.  Employers who pay the state unemployment tax on a timely basis will receive an offset credit of up to 5.4%. Therefore, the net federal tax rate is generally 0.8%.

Appendix D 25 Payroll tax expense results from three taxes that governmental agencies levy on employers. SO 3 Describe and record employer payroll taxes. Employer Payroll Taxes These taxes are: FICA taxes Federal unemployment tax State unemployment tax  SUTA basic rate is usually 5.4% on the first $7,000 of wages paid.

Appendix D 26 Exercise: In January, gross earnings in Yoon Company totaled $90,000. All earnings are subject to 8% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Instructions: Prepare the entry to record January payroll tax expense. SO 3 Describe and record employer payroll taxes. Employer Payroll Taxes

Appendix D 27 Exercise: Prepare the journal entry for Yoon Company in January. Gross earnings in totaled $90,000, all earnings are subject to 8% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Jan. 31Payroll Tax Expense12,780 FICA Taxes Payable7,200 * Federal Unemployment Taxes Payable720 ** State Unemployment Taxes Payable4,860 *** * FICA - $90,000 x 8% = $7,200 ** FUTA - $90,000 x 0.8% = $720 *** SUTA - $90,000 x 5.4% = $4,860 SO 3 Describe and record employer payroll taxes. Employer Payroll Taxes

Appendix D 28 Employer payroll taxes do not include: a.Federal unemployment taxes. b.State unemployment taxes. c.Federal income taxes. d.FICA taxes. Question SO 3 Describe and record employer payroll taxes. Employer Payroll Taxes

Appendix D 29 Companies must report FICA taxes and federal income taxes withheld no later than one month following the close of each quarter. Companies generally file and remit federal unemployment taxes annually on or before January 31 of the subsequent year. Companies usually file and pay state unemployment taxes by the end of the month following each quarter. Employers must provide each employee with a Wage and Tax Statement (Form W-2) by January 31. SO 3 Describe and record employer payroll taxes. Filing and Remitting Payroll Taxes

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