Business Accounting Chapter 12

Importance of Payroll Records Required by law – keep accurate payroll records – report employee earnings – pay payroll taxes Keep employees happy Huge expense

The Payroll System Calculate Earnings Calculate Deductions Prepare Payroll Checks Report Payroll Info to Government Update the Payroll and Accounting Records

Payroll: list of employees and payments due to each employee for specific pay period

Pay Period: amount of time over which employee is paid – weekly – biweekly (every other Friday) – semimonthly (the 1 st and the 15 th ) – monthly

Payroll Clerk: prepares payroll

Calculating Gross Earnings Gross Earnings: – amount of money earned for working

Wage: usually for manual or unskilled labor regular hours worked * hourly pay rate

Time Card records arrival and departure times – written in manually or punched in on time clock – usually rounded to the nearest quarter hour

Electronic Badge Reader used for greater accuracy to the minute – id card is swiped through an electronic reader – recorded info is uploaded to payroll computers

Salary: usually for managers and supervisors set amount of annual pay – (not based on hours worked)

Commission: paid a percentage of sales

Salary Plus: base salary plus commission on sales

Bonus: special pay for meeting certain performance standards

Overtime: (hrs worked > 40 per week) * hourly rate * 1.5 – Fair Labor Standards Act of 1938 – some employees are exempt from overtime laws

Payroll Deductions amounts subtracted (withheld) from gross earnings

Deductions Required by Law: Federal Income Tax Withholding – based on estimate of actual income tax to be owed at end of year

employee prepares Form W-4 for employer specifying: – marital status – allowances usually one allowance for you and each dependent more allowances equals less withholding must withhold at least 90% of total tax liability or pay penalty

Calculating federal Withholding employer uses a tax table from IRS to determine how much to withhold employer withholds money and forwards to the government for the employee – acts as a collection agent

some employees are exempt from withholding if all the following apply: – no tax liability last year – expects no liability this year – if income more than $700 and includes nonwage income, and not claimed as dependent on someone else’s tax return

FICA Federal Insurance Contribution Act of 1935 Social Security provides income to retired and disabled persons Medicare provides health insurance for the elderly

Tax rates are set by Congress (can change at any time) – Social Security 6.2% on income up to $110,000 in 2010 up to $ 94,200 in 2005 – Medicare 1.45% – State and Local Taxes some states use tables and some use rates – Illinois uses a rate of 3% some states do not charge income tax

Voluntary Deductions amounts that the employee asks the employer to withhold and forward for the employee

union dues easier for the union – one payment from employer, not payments from thousands of employees

insurance premiums employees contribute a part or all of the premium – health – life – disability

pensions if a company still has an open pension plan – employees contribute percentage if they want to participate

401(k) or 403(b) named after an IRS code section one of the greatest inventions of all time – invest pretax dollars – grow tax deferred – possibly get company match free money

direct deposits – net pay is electronically deposited into bank account on pay day

charitable contributions automatic way to give back to community

GROSS EARNINGS – DEDUCTIONS ======================= NET PAY (TAKE-HOME PAY)

Payroll Records Payroll Register Employee’s Earnings Record

Payroll Register summarizes information – all the employees’ earnings for each period source document for payroll checks source document for payroll journal entry

Employee’s Earnings Record all payroll information for one employee includes column for accumulated earnings totaled on a quarterly basis