Payroll Computations, Records, and Payment Chapter 10 Payroll Computations, Records, and Payment

Payroll Laws & Taxes Employee vs. independent contractor Federal Employee Earnings & Withholding Laws Fair Labor Standards Act of 1938 Social Security Tax Medicare Tax Federal Income Tax Employee – hired by and works under the control and direction of the employer. Employer normally provides tools and equipment used by the employees, sets the working hours, and determines how the employee completes the job. Independent Contractor – paid by the company to carry out a specific task or job but is not under the direct supervision or control of the company – will not deal with independent contractors in this chapter. Fair Labor Standards Act – also referred to as the Wage and Hour Law, applied only to firms engaged directly or indirectly in interstate commerce. This law sets a minimum hourly rate of pay and maximum hours of work per week to be performed at the regular rate of pay. Minimum hourly rate = $5.15 at book printing and maximum number of hours was 40 hours. Still correct ($2.13 for tipped employees as long as the employee’s cash wages = $5.15 and if not employer must make up the difference.

State & Local Taxes Employer’s Payroll Taxes & Insurance Costs Social Security Tax (FICA) Medicare Tax Federal Unemployment Tax (FUTA) State Unemployment Tax (SUTA) Workers’ Compensation Insurance SS tax – taxes on the first $76,200 of earnings base. Will use 6.2% - employer generally remits to the federal government the social security tax withheld plus the employer’s share of the social security tax Medicare Tax = 1.45% of earnings. Periodically the employer pays to the Federal Government the Medicare tax withheld plus the employer’s share of the Medicare tax. Remitted to the federal government FUTA – employers pay the entire amount of these taxes and we assume that the earnings base is $7,000. However that base is determined based on the employer’s turnover rate, etc. SUTA – employers pay all of the SUT taxes and the usualy earnings base for federal and state unemployment taxes are the same on the first $7,000 of each employee’s earnings for the year. In many states the SUTA tax rate is 5.4%. The federal tax rate (6.2%) can be reduced by the rate charged by the state and the SUTA can be as low as 0.8% (6.2% - 5.4% = 0.8%) Workers’ Comp – protects employees against losses from job-related injuries or illnesses, or compensates their families if death occurs in the course of the employment. Requirements defined by each state.

Calculating Earnings & Taxes Computing Employee Total Earnings Hourly rate basis Salary basis Commission basis Piece-rate basis

Hourly Employees Need two pieces of data from weekly time sheets, time cards, etc. Number of hours worked Rate of Pay Gross Pay Regular rate Overtime rate – 1½ times regular rate

Withholdings for Hourly Employees Required by Law FICA (Social Security) 6.2% on the first $76,200 Medicare 1.45% Federal income tax Use wage-bracket table method # of withholding allowances (W-4) Total earnings during pay period

Withholdings Not Required by Law Group life insurance Group medical insurance Company retirement plans Bank or credit union savings plans Loan repayments Savings bonds, stocks, investment plans Union dues

Determining Pay for Salaried Employees Hours Worked Salaried workers who do not hold supervisory jobs - covered by the Wage & Hour Law Salaried workers who hold supervisory or managerial positions – are exempt from the Wage & Hour Law Withholdings required by law Same procedures for salaried or hourly employees.

Recording Payroll for Employees Payroll Register Allowances Marital Status Cumulative Earnings No. of hours worked Rate or Salary

Recording Payroll for Employees Payroll Register Continued Earnings Regular – Overtime – Gross - Cumulative Taxable Wages Social Security - Medicare – FUTA Deductions SS – Medicare – Income Tax - Other Distribution Net Amount – Check # - Type

Recording Payroll Information Two separate journal entries: Record the payroll expense for the employer Payment to the employees Can be written on the regular bank account Individual payroll checks issued from a payroll bank account

Individual Earnings Record Individual Earnings record is created for each employee Also called a compensation record Shows all the payroll information for one person through his employment history

Payroll Entry #1 Salaries Expense 1,960.00 Gross wages Salaries Expense 1,960.00 Social Security Tax Payable 121.52 Medicare Tax Payable 28.42 Employee Income Tax Payable 173.00 Health Insurance Premiums Payable 40.00 Salaries Payable 1,597.06 Payroll for week ending 3/3/05 Net wages

Payroll Entry #2 Salaries Payable 1,597.06 Cash 1,597.06 Net wages Salaries Payable 1,597.06 Cash 1,597.06 Payment of salary for week ending 3/3/05.

Completing the Payroll The two payroll journal entries below must be posted to the ledger accounts. To record the employer’s share of the payroll, and To record the payment of payroll to the employees

Learning Objectives Explain the major federal laws relating to employee earnings and withholding Compute gross earnings of employees Determine employee deductions for social security tax Determine employee deductions for Medicare tax Determine employee deductions for income tax Enter gross earnings, deductions, and net pay in the payroll register Journalize payroll transactions in the general journal Maintain an earnings record for each employee Define the accounting terms new to this chapter