Unit 7: Analyzing & Journalizing Payroll Transactions Chapter 6

Accounting for Payroll Transactions Payroll requires entering data (in order) in the following places: Payroll Register Employee Earnings Records General Journal Journalize gross wages and withholdings Journalize payroll taxes and worker’s compensation Journalize period-end accruals Post to General Ledger

*Use payroll register to journalize* Payroll register lists employees in rows and shows following information for each Gross wages Taxes withheld and other deductions Net pay Payroll register shows (in columns) Total of gross wages, each deduction and net When completed, should “foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number *Use payroll register to journalize*

Employee’s Earnings Record 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 payroll analyses- various internal and external reports

Recording Gross Payroll and Withholdings Next screens shows how to enter information into accounting system Gross payroll is debited Each withholding tax is liability Each withholding tax is a liability Advanced EIC reduces FIT payable All other payroll deductions are liabilities as well

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: Group life insurance premiums Health insurance premiums Purchase government savings bonds Union dues Deferred compensation (contributions to pensions plan) Child support/other garnishments

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 Child support (see next slide) Creditor garnishments limited depending upon state Administrative wage and student loan garnishments to 15% of disposable earnings

Child Support Family Support Act of 1988 required immediate withholding for child-support payments ER can withhold a state mandated fee for administration Some states now require electronic submission of garnished child support payments Maximum amount that can be withheld from a person’s weekly disposable earnings varies according to different support orders, but can be as high 50-65% of disposable earnings

Pension & Retirement Contributions Pension plans that involve employee contributions result in liability for the employer Recorded in payroll entry Pension Protection Act of 2006 gives company ability to automatically enroll EEs in company’s plan and deduct contributions from pay

Methods of Paying Wages/Salaries Cash/Check Electronic payment methods EFTS (Electronic funds transfer system) Distribute electronic pay stub Pay Cards Cards that allow ER to deposit payroll into prepaid card; card then utilize like debit or credit card As of 2006, 30 states allow their use Final Pay Many states set time limit between termination and final wage pay out CA and MI require immediate payment if EE is fired

Journal Entries to Record Payroll Journal Entry #1 - Record gross wages, withholdings and net pay Journal Entry #2 - Record Employer payroll tax expense These two journal entries are always the same in format. 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 Gross OASD HI FIT SIT Insurance Net 1000.00 62.00 14.50 83.00 21.00 103.00 716.00 845.00 52.39 12.25 91.00 29.00 88.00 572.36 $1845.00 $114.39 $26.75 $174.00 $50.00 $191.00 $1,288.86

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 #1 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 Payroll for Period Ended 5/15/2008 EE Gross FUTA Wages SUTA Wages OASDI Wages HI Wages A 1,000.00 ---- 800.00 1,000.00 1,000.00 B 845.00 215.00 845.00 845.00 845.00 Total $1845.00 $215.00 $1645.00 $1845.00 $1845.00 Tax $1.72 $46.06 $114.39 $26.75

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 wage bases and percentages Journal Entry #2 Payroll Tax expense 188.92 FUTA Payable 1.72 SUTA Payable 46.06 OASDI Payable 114.89 HI Payable 26.75

Recording Deposit of Payroll Taxes Look in general ledger, in each applicable liability account, for amount due Deposit 941 Taxes Note: Don’t forget to double OASDI Payable 228.78 OASDI and HI HI Payable 53.50 FIT Payable 174.00 Cash 456.28 Deposit State income tax Sit Payable 50.00 Cash 50.00 Deposit SUTA SUTA Payable 46.06 Cash 46.06

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 Premium are calculated based on employment classification– per $100 of payroll Pay premium in advance based on projected wages Then, at year-end, report actual wages and pay additional premium Or may receive credit toward next year

Journal Entry for Workers Compensation Debit Work Comp. Insurance Expense for premium paid Credit Cash (if paying) or insurance Payable (if accruing) Payroll for Period Ended 5/15/2008 Per $100 of payroll EE Gross Position Workers Comp. Rate Premium A 1000.00 Fabricator 9.08 90.80 B 845.00 Administrator 1.85 8.87 Total $1845.00 $99.67 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; To record unpaid wages Wage Expense 1589.96 Wages Payable 1589.96 Accrued vacation pay should be recorded for amount of vacation pay owed employees Many ER’s now merging sick time and vacation time Vacation Benefits Expense 520.00 Vacation Benefits Payable 520.00

Summary of Accounts Used Account Title Normal Balance Type of Account FIT Payable Credit Liability SIT Payable Insurance Payable Union Dues Payable Wages Payable Vacation Benefits Payable

Summary of Accounts Used Account Title Normal Balance Types of Account Wage expense Debit Expense Payroll Tax Expense Workers’ Compensation Insurance Expense Vacation Expense OASDI Payable Credit Liability HI Payable FUTA Payable SUTA Payable