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F- 2 F PAYROLL ACCOUNTING Accounting, Fifth Edition

F- 3 After studying this chapter, you should be able to: 1. 1.Compute and record the payroll for a pay period Describe and record employer payroll taxes Discuss the objectives of internal control for payroll. Learning Objectives

F- 4 “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). Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.. Accounting for Payroll LO 1 Compute and record the payroll for a pay period.

F- 5 Total compensation earned by an employee (wages or salaries, plus any bonuses and commissions). LO 1 Compute and record the payroll for a pay period. Illustration F-1 Determining the Payroll Gross Earnings

F- 6 Mandatory:  FICA tax  Federal income tax  State and City income tax Payroll Deductions LO 1 Compute and record the payroll for a pay period. Voluntary:  Charity  Insurance and Pensions Determining the Payroll Other:  Union dues

F- 7 Payroll Deductions LO 1 Compute and record the payroll for a pay period. Social Security taxes ► Supplemental retirement, employment disability, and medical benefits. ► In 2012, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $110,100 of gross earnings for each employee. Determining the Payroll Mandatory:  FICA tax  Federal income tax  State and City income tax

F- 8 Payroll Deductions LO 1 Compute and record the payroll for a pay period. ► Employers are required to withhold income taxes from employees pay. ► Withholding amounts are based on 1.gross earnings, 2.number of allowances claimed, and 3.length of pay period. Determining the Payroll Mandatory:  FICA tax  Federal income tax  State and City income tax

F- 9 Employee must complete an Employee’s Withholding Allowance Certificate (Form W-4). LO 1 Compute and record the payroll for a pay period. Illustration F-5 Determining the Payroll

F- 10 Payroll Deductions LO 1 Compute and record the payroll for a pay period. ► Most states (and some cities) require employers to withhold income taxes from employees’ earnings. Mandatory:  FICA tax  Federal income tax  State income tax Determining the Payroll

F- 11 Gross earnings minus payroll deductions. Net Pay LO 1 Compute and record the payroll for a pay period. Illustration F-7 Determining the Payroll

F- 12 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 LO 1 Illustration F-8 Employee earnings record Recording the Payroll

F- 13 Maintaining Payroll Department Records Recording the Payroll Illustration F-9 LO 1

F- 14 LO 1 Compute and record the payroll for a pay period. Recording the Payroll Recognizing Payroll Expenses and Liabilities From the payroll register in Illustration F-9, a journal entry is made to record the payroll for the week ending January 14.

F- 15 Payroll tax expense results from three taxes that governmental agencies levy on employers. LO 2 Describe and record employer payroll taxes. Employer Payroll Taxes These taxes are:  FICA tax  Federal unemployment tax  State unemployment tax ► Same rate and maximum earnings as the employee’s. ► In 2012, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $110,000 of gross earnings for each employee.

F- 16 LO 2 Describe and record employer payroll taxes. Employer Payroll Taxes ► 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%. These taxes are:  FICA tax  Federal unemployment tax  State unemployment tax Payroll tax expense results from three taxes that governmental agencies levy on employers.

F- 17 LO 2 Describe and record employer payroll taxes. Employer Payroll Taxes ► SUTA basic rate is usually 5.4% on the first $7,000 of wages paid. These taxes are:  FICA tax  Federal unemployment tax  State unemployment tax Payroll tax expense results from three taxes that governmental agencies levy on employers.

F- 18 LO 2 Describe and record employer payroll taxes. Employer Payroll Taxes Recording Employer Payroll Taxes The entire amount of gross pay ($17,210.00) shown in the payroll register in Illustration F-9 is subject to each of the three taxes mentioned above. Accordingly, the entry to record the payroll tax expense associated with the January 14 payroll is:

F- 19 Employer payroll taxes do not include: a.Federal unemployment taxes. b.State unemployment taxes. c.Federal income taxes. d.FICA taxes. Question LO 2 Describe and record employer payroll taxes. Employer Payroll Taxes

F- 20 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. LO 2 Describe and record employer payroll taxes. Filing and Remitting Payroll Taxes

F- 21 LO 2 Filing and Remitting Payroll Taxes Illustration F-12

F- 22 As applied to payroll, the objectives of internal control are to 1. safeguard company assets against unauthorized payments of payrolls, and 2. ensure the accuracy and reliability of the accounting records pertaining to payrolls. LO 3 Discuss the objectives of internal control for payroll. Internal Control for Payroll

F- 23 Internal control feature: Human Resources department documents and authorizes employment. Fraud prevented: Fictitious employees are not added to payroll. LO 3 Discuss the objectives of internal control for payroll. Internal Control for Payroll

F- 24 Internal control feature: Supervisors monitor hours worked through time cards and time reports. Fraud prevented: Employee works appropriate hours. LO 3 Discuss the objectives of internal control for payroll. Internal Control for Payroll

F- 25 Internal control feature: Two (or more) employees verify payroll amounts; supervisor approves. Fraud prevented: Payroll calculations are accurate and relevant. LO 3 Discuss the objectives of internal control for payroll. Internal Control for Payroll

F- 26 Internal control feature: Treasurer signs and distributes prenumbered checks. Fraud prevented: Checks lost through theft; falsely endorsed used to pay for hours not worked. LO 3 Discuss the objectives of internal control for payroll. Internal Control for Payroll

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