CHAPTER TWENTY SIX PAYROLL PROCEDURES

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Compute gross earnings using different pay plans. 2. Read a time card and compute regular hours and overtime hours. 3. Compute deductions and net pay. 4. Prepare a payroll register and employee earnings record. 5. Journalize the payroll and payroll taxes. PAYROLL PROCEDURES Chapter Outcomes:

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Pay Plans Salary Plan Hourly-Rate Plan Piece-Rate Plan Commission Plan

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Computing Gross Earnings Gross earnings may include both regular earnings and overtime earnings. When an employee works over 40 hours, overtime must be paid at a rate of at least 1.5 times the regular rate.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Computing Gross Earnings (continued) Regular hours are multiplied by the hourly rate. Hours x rate = pay Overtime hours worked are multiplied by the overtime rate. Hours x rate = OT Regular earnings and overtime earnings are added together to calculate gross pay.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Determining Employee Deductions Federal Income Tax Withholding Social Security Tax (FICA) Medicare Tax Other Deductions

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Computing Net Pay Gross Earnings - Deductions = Net Pay

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Preparing Payroll Records Many businesses use a payroll register to record the pay to employees. A payroll register includes the information about the employee and his/her earnings--marital status, withholding allowance, hours worked, earnings, deductions, net pay, and check number.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Paying the Employees Each employee should get a paycheck along with an explanation of any deductions.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording the Payroll In the General Journal, the transaction would look like this:

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording the Employer’s Payroll Taxes Most businesses are subject to several payroll taxes -- the employer’s social security tax, Medicare tax, federal unemployment tax, and state unemployment tax.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Recording the Employer’s Payroll Taxes (continued) The General Journal entry would look like:

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Payroll Tax Forms A number of payroll tax forms are required by the federal government. Employers Quarterly Federal Tax Return (Form 941) Wage and Tax Statement (Form W-2) Transmittal of Income and Tax Statements (Form W-3) Annual Federal Unemployment Tax Return (Form 940) Federal Tax Deposit (Form 8109) accompanies each payment of Federal Taxes.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Accounting Terminology Direct deposit Employee earnings record Gross earnings Hourly-rate plan Net pay Overtime Pay statement Payroll taxes Piece-rate plan Salary commission plan Salary plan Time cards Time clock Time sheets Year-to-date earnings

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary The total amount an employee earns is known as gross earnings. Gross earnings may include both regular earnings and overtime earnings. Net pay is gross earnings less deductions.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary (continued) The amount of federal income tax withheld for each employee depends on gross earnings, marital status, and the number of withholding allowances.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary (continued) By law, businesses must keep detailed records of the hours worked, gross earnings, deductions, and net pay of their employees.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary (continued) After the payroll is computed, it must be recorded in the General Journal. When the employees are paid, an entry is made in the cash payments journal.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary (continued) Most businesses are subject to several payroll taxes -- the employer’s social security and Medicare tax, federal unemployment tax, and state unemployment tax

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Summary (continued) Businesses must prepare a number of payroll tax forms for the federal government. Other payroll tax forms may be required by state and city tax agencies.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Investigating on the Internet As a research assignment, access the IRS web site and report those sources of information that might concern payroll taxes.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved The total amount an employee earns is known as net earnings. 2. Most businesses are subject to payroll taxes. 3. Not all businesses must keep detailed records of employee pay. Topic Quiz Answer the following true/false questions: TRUE FALSE

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved (Return to Topic Quiz) 1. The total amount an employee earns is known as net earnings. FALSE The total amount an employee earns is known as gross earnings.

McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved (Return to Topic Quiz) 3. Not all businesses must keep detailed records of employee pay. FALSE All businesses must keep detailed records of employee pay.