Chapter 11 Payroll Liabilities Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD In this chapter… Balance Sheet Current Assets Cash 10000 Current Liabilities Accounts Payable Chapter 5000 Accounts Receivable 20000 Wages Payable 11 18500 Notes Receivable 15000 EI Payable 550 Marketable Securities 25000 CPP Payable 1400 Inventory 120000 Tax Payable 3550 Capital Assets Other Ded. Payable 1000 Equipment 250000 Utilities Payable 2000 Buildings 500000 Long-Term Debt 620000 Goodwill 60000 Owner’s Equity 348000 Total Assets 1000000 Total Liabilities + OE Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD Payroll Accounting Payroll Accounting is responsible for: Recording cash payments made to employees Providing information about labour costs For many companies, labour cost is their most consistent and costly expense Accounting for amounts withheld from employee pay Accounting for employee benefits Providing means through which employers can comply with government regulations regarding employee compensation Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD Payroll Deductions Payroll deductions are amounts withheld from the wages of employees note: amounts are withheld from wages actually paid The amount withheld is determined by their wage amount The amount of personal tax credits A look-up table is supplied by CCRA to help employers calculate the amount to be withheld based on the above Employers remit withholdings monthly The amount of personal tax credits is determined when the employee completes their TD1 form A TD1 form is usually completed by an employee within the first few days of starting work with the employer. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Canada Pension Plan (ignore QPP) Every working person between ages 18 and 70 must pay CPP The deduction is based on a percentage of wages to a maximum amount (now $50,100 , but use your books number of $42,800) The employer matches 100% the employee contribution and remits both Self-employed individuals must make the remittance for both the employee and employer An easy way to calculate CPP Determine the amount of pay (in terms of weeks or months) Determine exemption amount If paid in weeks, take $3500 / 52 weeks = $67.31 / week exemption If paid in months, take $3500 / 12 months = $291.67 / month exemption CPP Deduction = (the weekly or monthly pay - exemption) * .0495 Employer contribution = Employee CPP deduction Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD Employment Insurance EI coverage is extended to all Canadians who are not self-employed Employers must deduct and amount based on a percentage of gross income to a maximum amount (now $45,900, but use the books number of $42300). Employers must pay an amount 1.4 times that of the employees’ amount and remit the combined amount. An easy way to calculate EI deductions Determine the amount of pay EI Deduction = .0173 * amount of pay Note the rate is currently 0.0183, but use the books rate of 0.0173 Employer contribution = Employee contribution * 1.4 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD Income Tax Income taxes vary by province due to the provincial amount Easiest way to calculate Income Tax is to use look-up tables Determine how the employees are paid (monthly or weekly) Determine the individual employees’ TD1 Claim Code Ensure you are using the right look-up tables There are look-up tables for monthly or weekly amounts – choose the right one Look up the federal amount for the proper TD1 Claim Code Look up the provincial amount for the proper TD1 Claim Code Add ‘em up, Income Tax Deduction = Fed Amount + Prov Amount There is no employer contribution for tax. They pay their own taxes. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD Withholding Tables Wage bracket withholding tables make the calculation to determine amounts to be withheld for CCP (or QPP) and EI easy for employers. The tables can be downloaded from a government website. These tables are also available in electronic format so payroll and accounting software applications can use them. These tables are updated on (usually) a semi-annual basis. Exhibit 11.3 illustrates examples of deductions tables The tables use gross pay (regular + overtime) as the look-up amount The income tax deduction amounts are based on gross pay less amounts deducted for CPP and EI In effect we are not taxed on amounts paid to CPP and EI This is done for you if you use the tax tables Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD T4 Form The T4 Statement is the report that employers provide to CCRA and to employees that summarizes their gross wages and source deductions It usually includes Total Gross Wages Taxable benefits received from employers Income taxes withheld Deductions for a registered pension CPP contributions EI deductions Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD The Payroll Register Payroll Register is a simple table that summarizes the pay given to the employees each pay Exhibit 11.2 provides an example It contains the following by employee name: Hours worked (or salary earned) Overtime (OT) hours if applicable Calculates gross pay based on regular time and over time Outlines amounts deducted for CPP, EI, and Tax Shows net pay Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Recording the Journal Entries EI Payable, Income Tax Payable, CPP Payable and EI Payable are current liabilities the employer is responsible for Salaries Payable is what is owed to employees on the next pay Other deductions might be employee contributions to a health plan Date Account Titles and explanation PR Debit Credit July 31 Salaries Expense 25000 EI Payable 550 Employees’ Income Tax Payable 3550 CPP Payable 1400 Wages Payable 18500 Other deductions Payable 1000 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Recording the Journal Entries When actually paying the employees, the journal entry becomes When paying out EI, CPP and Taxes, the journal entry is: Date Account Titles and explanation PR Debit Credit July 31 Wages Payable 18500 Cash Date Account Titles and explanation PR Debit Credit July 31 EI Payable 550 Employees’ Income Tax Payable 3550 CPP Payable 1400 Cash 5500 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Mid-chapter Demo Problem Lets try the Mid-chapter demo problem Prepare a Payroll Register that summarizes 3 employees’ pay for the week Determine the EI, CPP and Tax to be deducted Illustrate how the other deductions are considered in the calculation of net pay Show the journal entry for the 3 employees Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD The Employer Side For both CPP and EI, employers must supplement the amount paid by employees. The amounts contributed by employers are remitted at the same time as those for employees and so are usually held in the same payables and expense accounts These amounts are considered payroll related expenses and are recorded as EI or CPP Expenses (refer to page 561 for an example) Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD Employee Benefits Workers Compensation Employers are required to insure their employees against injury or disability resulting from employment Employer Contributions to Employee Insurance or Retirement Sometimes employers will pay or will match employee contributions to a benefit. (Refer to bottom of p 563) The amount may be calculated in a number of ways (% of income, set amount, etc), but the journal entry would be: Date Account Titles and explanation PR Debit Credit May 30 Benefit Expense 550 Retirement Plan Payable 200 Eye Benefit Payable 350 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD Vacation Vacation Pay Employers must allow vacation time. Full time regular employees use the vacation allotment as time. Contractors may be paid vacation allotment in advance Some companies set up a vacation pay liability drawn on when employees go on vacation. Others just pay it as regular income when the employee is on vacation Vacation pay is calculated as a % of gross earnings. Example: If 2 weeks of vacation are offered per year, the percent of gross income allocated per pay period for vacation is 2/(52-2) = .04 or 4% If 3 weeks are allowed 3/(52-3) = 6.12% Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Journal Entries for Vacation The employer assigns a vacation amount to a liability: When employees take vacation, they draw on the liability and pay EI, CPP and Taxes: Date Account Titles and explanation PR Debit Credit Oct 31 Benefits (or Wages) Expense 2500 Vacation Payable Date Account Titles and explanation PR Debit Credit Dec 31 Vacation Payable 500 EI Payable xxx Employees’ Income Tax Payable CPP Payable Salaries Payable Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Demonstration Problem Check out the End of Chapter Demo problem This is a good comprehensive problem Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Dave Ludwick, P.Eng, MBA, PMP, PhD Exercises Try Exercises 11-4 11-6 Try Problems 11-1A 11-3A Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD