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Chapter 10 review 10 Chapter
Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Chapter 10 Payroll Computations, 10 Chapter

Chapter 10 Payroll Computations, Records, and 10 Chapter

Chapter 10 Payroll Computations, Records, and Payment 10 Chapter

Section 1: Payroll Laws and Taxes
Chapter 10 Payroll Computations, Records, and Payment Section 1: Payroll Laws and Taxes Section Objectives Chapter 9 discussed several aspects of business accounting, including special journals, the petty cash fund, and bank reconciliations. Chapter 10 continues the study of business accounting by discussing payroll accounting. Section 1 explains the major federal laws relating to employee earnings and withholdings. The first objective of the chapter explains the major federal laws relating to employee earnings and withholding. 10-1 Explain the major federal laws relating to employee earnings and withholding. Atef Abuelaish

Characteristics of an Employee
Works under the control and direction of the employer Uses tools or equipment provided by the employer Works certain hours that are set by the employer An employee is a person who is hired by and works under the control and direction of the employer. There are several common characteristics of an employee. In most situations, an “employee” works in the employer’s facility, using the employer’s tools, under the employer’s direct supervision. An independent contractor works unsupervised, usually away from the employer’s facility. This chapter discusses the withholding for an employee, not an independent contractor. (An independent contractor is responsible for paying all payroll related taxes related to income.) Atef Abuelaish

Legal Aspects of Employee Payroll
Someone whose work is under the direction of the employer Withhold taxes Independent Contractor Performs a job for the employer but decides how to do the work Do not withhold taxes Part I An employee is someone whose work is under the direction of the employer, such as a bookkeeper or secretary. The employer controls what work the employee is to do and how it should be done. For example, employees are typically trained to perform tasks in a certain way. The employer does withhold money for taxes for employees. Part II An independent contractor performs a job for the employer, but decides how to do the work. Independent contractors typically do not receive training from the employer. The employer does not withhold any money for taxes for independent contractors.

Explain the major federal laws relating to employee
Objective 10-1 Explain the major federal laws relating to employee earnings and withholding. What are the major laws relating to employee earnings and withholding? Atef Abuelaish

The Fair Labor Standards Act of 1938
Also referred to as the Wage and Hour Law. Applies only to firms engaged directly or indirectly in interstate commerce. Sets a minimum hourly rate of pay and maximum hours of work per week to be performed at the regular rate of pay. The most significant law is the Fair Labor Standards Act. This is sometimes referred to as the Wage and Hour Law. The law applies to firms engaged directly or indirectly in interstate commerce. The Fair Labor Standards Act fixes minimum wage and the maximum number of hours or work per week to be performed at the regular rate of pay. Hours worked in excess of 40 must be paid at one and one-half times the regular rate of pay. Employees who work beyond 40 hours a week are entitled to “time and a half” times the regular rate of pay for the extra hours. Atef Abuelaish

Fair Labor Standards Act
Applies to businesses operating across state lines Sets minimum wage Sets 1½ times the normal hourly rate as the minimum overtime pay rate Sets a 40 hour work week at the normal pay rate The Fair Labor Standards Act applies to firms engaged in business across states. It sets a minimum wage and sets 40 hours as the most an employee can be required to work in a week at the normal pay rate. Employees that work more than 40 hours in a work week receive overtime pay. This pay is at least one and one half times their normal pay rate for those overtime hours. 9-13

Federal Insurance Contributions Act (FICA)
Social Security Benefits Retirement, disability, and survivors 2016 Rate 6.2% on first $118,500 Medicare Benefits Medical 2016 Rate 1.45% on all earnings Part I The federal Social Security system pays benefits to qualified workers. The law requires employers to withhold FICA taxes from employees. Employers usually separate FICA taxes into two groups. The first group is called Social Security benefits and includes payments for retirement and disability and to survivors. This group is paid for with Social Security taxes. In 2009, the Social Security tax rate was 6.2% of the first $106,800 the employee earns during the year. Employers must also pay the Social Security tax in an amount equal to what the employee contributes. This is sometimes referred to as matching because the employer must match what the employee pays in for this tax. Part II The second group is Medicare benefits and includes all payments for medical purposes. This group is paid for with Medicare taxes. There is no upper limit on the amount of Medicare tax an employee could pay. Employers must also match the Medicare tax payments made by their employees. 9-14

1) Social Security Tax The amount of social security tax is determined by: As of 2016 rate 6.2% earnings up to a calendar year earnings base $ 118,500 The rate (6.2%) has remained constant in recent years. The earnings base has increased each year. The tax provides for retirement, disability, and death benefits. It also provides survivor benefits for the worker’s minor dependent children and spouse if the worker dies or is disabled. Social security tax is a tax imposed by the Federal Insurance Contributions Act (FICA) and collected on employee earnings to provide retirement and disability benefits. The Social Security’s Old-Age, Survivor’s and Disability Insurance (OASDI) provides benefits for employees and their families, including: retirement benefits when a worker reaches the eligible retirement age, benefits for the dependents of a retired worker and benefits for the worker and the worker’s dependents when a worker is disabled. The Social Security act also provides benefits for a worker’s surviving minor dependent children and spouse if the worker dies. The tax is subject to maximums which often change. As of 2010l the social security rate was still 6.2%; the earnings base was $106,800. Atef Abuelaish

2) Medicare Tax The amount of Medicare tax is determined by:
rate 1.45% earnings total earnings The rate (1.45%) has remained constant in recent years. Medicare tax is a tax levied on employees and employers to provide medical care for the employee and the employee’s spouse after each has reached age 65. The current Medicare tax rate is 2.9% % is withheld from the employee’s paycheck and the other 1.45% of the employee’s tax is paid by the employer. So, out of an employees gross wages, Medicare is withheld at the rate of 1.45% and social security is withheld at the rate of 6.2%. The employer pays a matching portion. The Medicare tax does not have an earnings limit, so the tax applies to all earnings paid during the year. The Medicare tax does not have an earnings base limit. Atef Abuelaish

3) State and Local Taxes Most states, and many local governments, may require employers to withhold income taxes from employees’ earnings to prepay the employees’ state and local income taxes. The rules are generally almost identical to those governing federal income tax withholding. Employers are required to withhold income taxes from the employee’s earnings. Federal income tax is an additional withholding tax which comes out of an employee’s gross wages. Employees subject to federal income tax withholding may also be subject to state and/or local income tax withholding in most states. There are a few states which don’t require employees to pay state income taxes (Alaska, Washington, and Texas are examples.) Atef Abuelaish

4) Employer’s Payroll Taxes and Insurance Costs
Employers withhold social security and Medicare taxes from employees’ earnings. In addition, employers pay social security and Medicare taxes on their employees’ earnings. Employers are also required to pay: Federal unemployment tax (FUTA) State unemployment tax (SUTA) Workers’ compensation insurance in some states. (Not a tax) Employers must pay the following payroll taxes: State Unemployment Tax (SUTA), Federal Unemployment Tax (FUTA), Social Security Tax (1/2 of employee’s), Medicare Tax (1/2 of employee’s). Only employers pay Federal Unemployment tax. Sometimes this tax is referred to as FUTA. The employee does not pay this tax. State unemployment taxes (SUTA) are taxes levied by the state government against employers to benefit unemployed workers. Sometimes this tax is referred to as SUTA. The FUTA and SUTA tax rates are applied to a taxable earnings base. We will assume that $7,000 is the wage base maximum. Employers get a credit for State unemployment taxes paid, applied against their Federal Unemployment tax liability. The “net” federal unemployment tax rate in that case is .6% (.006). The FUTA and SUTA tax rates are applied to a taxable earnings base. This text assumes that the taxable earnings base is $7000. Atef Abuelaish

5) Worker’s Compensation Insurance
QUESTION: What is workers’ compensation insurance? Workers’ compensation insurance is the insurance that protects employees against losses from job-related injuries or illnesses, or compensates their families if death occurs in the course of employment. ANSWER: In states where it is required, employers pay for insurance that will reimburse employees for losses resulting from job-related injuries or will compensate their families in the event of death in the course of their employment. Atef Abuelaish

Employee Records Required by Law
Federal laws require that certain payroll records be maintained. For each employee the employer must keep a record of: Employee’s name, address, social security number, and date of birth. Hours worked each day and week, and wages paid at the regular and overtime rates (certain exceptions exist for employees who earn salaries.) Cumulative wages paid during the year. Amount of income tax, social security tax, and Medicare tax withheld for each pay period. Proof that the employee is a United States citizen or has a valid work permit. The employer must keep a record of: Employee’s name, address, social security number, and date of birth, hours worked each day and week, wages paid at the regular and overtime rates, cumulative wages paid during the year, amount of income tax, social security tax, and Medicare tax withheld for each pay period, proof that the employee is a United States citizen or has a valid work permit. Failure to keep proper payroll records can result in hefty penalties for businesses. Atef Abuelaish

Payroll Computations, Records, and Payment
Chapter 10 Payroll Computations, Records, and Payment Section 2: Calculating Earnings and Taxes Section Objectives Section 2 of the chapter deals with the actual withholding calculations and recording those calculations in the payroll register. The second objective of the chapter explains how to compute gross earnings of employees. 10-2 Compute gross earnings of employees. 10-3 Determine employee deductions for social security tax. 10-4 Determine employee deductions for Medicare tax. 10-5 Determine employee deductions for income tax. 10-6 Enter gross earnings, deductions, and net pay in the payroll register. Atef Abuelaish

1) Compute Gross Earnings of Employees.
The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings. Hourly rate basis Salary basis Commission basis Piece-rate basis Objective two of this chapter is to compute the gross earnings of employees. The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings. You should practice computing these wages and salaries for each type of employee. Atef Abuelaish

Computing Gross Pay The gross pay for hourly employees for the week ended January 6 is determined as follows: Total hours Rate of pay Gross pay Alicia Martinez 40 hours X $ = $400.00 Jorge Rodriguez 40 hours X $ = $380.00 Gross pay is calculated by multiplying the number of hours times the rate of pay (unless there is overtime involved). Atef Abuelaish

Overtime George Dunlap earns $9.00 per hour. He worked 45 hours. He is paid 40 hours regular rate of pay and 5 hours at time and a half. Therefore, Dunlap’s gross pay adds up to: Regular earnings: hours X $ $360.00 = Overtime earnings: 5 hours X $ $ = Gross Pay $427.50 If overtime exists because the employee worked over 40 hours, the employee would be paid at the rate of one and one half times the normal hourly rate for the time over 40 hours. Atef Abuelaish

Withholdings Required by Law
Recall that federal law requires employers to make three deductions from employees’ gross pay: FICA (Social Security and Medicare) tax Federal income tax withholding Employers will withhold social security, Medicare and federal income tax from an employees wages. (State income tax, if applicable, would also be withheld.) Atef Abuelaish

2) Determine employee deductions for Social security tax.
Tax-exempt Wages Earnings in excess of the base amount ($118,500 as of 2016) are not subject to Social Security withholding. If an employee works for more than one employer during the year, the FICA tax is deducted and matched by each employer. When the employee files a federal income tax return, any excess FICA tax withheld from the employee’s earnings is refunded by the government or is applied to payment of the employee’s federal income taxes. Objective 3 has us calculating social security deductions. Any wages in excess of $113,700 (as of 2013) are not subject to social security tax. If an employee works for more than one employer, FICA taxes are deducted and matched by each employer. When the employee files a federal income tax return, any excess tax is refunded. (The employer, however would not receive any refund.) To determine the amount of social security tax to withhold, multiply the taxable wages by the social security tax rate and round off to the nearest cent. Remember that anything above the maximum wages is not subject to the tax. Atef Abuelaish

Medicare Tax 3) Determine employee deduction for Medicare tax.
To compute the Medicare tax to withhold from the employee’s paycheck, multiply the wages by the Medicare tax rate, 1.45 percent. Alicia Martinez $ X 1.45% = $ 5.80 Jorge Rodriguez X = $ 5.51 George Dunlap X = $ 6.20 Cecilia Wu X = $ 8.12 Employee Gross pay Tax rate Tax Total Medicare tax $25.63 Remember that there is no limit on the wages subject to Medicare tax. In this pay period, $25.63 was withheld from all employees wages for Medicare tax. Atef Abuelaish

4) Determine employee deductions for income tax.
The amount of federal income tax to withhold from an employee’s earnings depends on the: earnings during the pay period. frequency of the pay period (weekly, bi-weekly, semi-monthly etc.) marital status. number of withholding allowances. A substantial portion of the federal government’s revenue comes from the income tax on individuals. Withholding depends on earnings, frequency of the pay period, marital status, and number of allowances. Atef Abuelaish

Withholding Allowances
In the simplest circumstances, a taxpayer claims a withholding allowance for: the taxpayer. a spouse who does not also claim an allowance. each dependent for whom the taxpayer provides more than half the support during the year. As the number of withholding allowances increases, the amount of federal income tax withheld decreases. An allowance generally refers to the number of exemptions the person is going to claim at the end of the year on their income tax return (Form 1040). Atef Abuelaish

Wage and Tax Statement, Form W-2
Alicia Martinez earned gross wages of $20,800 during the period which is reported in box 1 of the form W-2. She had $988 of federal income tax withheld which is reported in box 2 of the W-2.

Transmittal of Wage and Tax Statements, Form W-3
The amounts on Form W-3 must equal the sums of the amounts on the attached Forms W-2. A Form W-3 is another of the annual tax reports that employers must complete and file with the IRS. Form W-3 verifies the company’s total social security tax withheld; total wages, tips, and other compensation; total federal income tax withheld; and other information for the year. The amounts on Form W-3 must be the same as the totals of the Forms W-2 and the four quarterly Forms 941 filed by the employer. 11-31

What is the Employee’s Withholding Allowance Certificate, Form W-4?
QUESTION: What is the Employee’s Withholding Allowance Certificate, Form W-4? The Employee’s Withholding Allowance Certificate, Form W-4 is a form used to claim exemptions (withholding allowances). ANSWER: To claim withholding allowances, each employee completes an Employee’s Withholding Allowance Certificate, Form W-4. Atef Abuelaish

Federal and State Income Tax Withholding
Form W-4 Employee’s Withholding Allowance Certificate Marital Status Number of Withholding Allowances An employee fills out an Employee’s Withholding Allowance Certificate (Form W-4). Form W-4 provides information that the employer will use to determine how much federal taxes to withhold from the employees paycheck. The amount withheld depends on the employee’s marital status, his or her gross pay, and the number of withholding allowances the employee claims. Gross pay is the total amount an employee earns before deductions, such as taxes. A withholding allowance lowers the amount of an employee’s gross pay that is taxed. Each employee gets one personal allowance, one for a spouse if they are married, and one for each child or dependent. The more allowances an employee claims, the less tax the employer withholds. Gross pay is the total amount an employee earns before deductions. 9-33

Employee’s Withholding Allowance Certificate (Form W-4)
Here is an example of an Employee’s Withholding Allowance Certificate (Form W-4). Notice the information requested on marital status and number of withholding allowances. 9-34

Computing Federal Income Tax Withholding
The wage-bracket table method is the most common way to compute the federal income tax withholding. The wage-bracket tables are in the Federal Publication 15, Circular E. The wage-bracket table method is the most common way to compute the federal income tax withholding. Employers choose the proper table based on pay period and employee’s marital status. Atef Abuelaish

Federal Income Tax Withholding
The employer uses a withholding table (called Circular E) from the IRS to compute the amount of federal taxes to withhold. The employer uses a withholding table (called Circular E) from the IRS to compute the amount of federal taxes to withhold. Separate withholding tables are provided for single or married persons, and for different pay periods (for example weekly or monthly). 9-36

Withholding Table Example—Single Persons Paid Weekly
Here is an example of a withholding table for a single person paid weekly. The employer would find the weekly wage amount in the left two columns and then locate the amount of income tax to be withheld based on the number of withholding allowances claimed by the employee on his or her W-4. 9-37

Withholding Table Example—Married Persons Paid Monthly
Here is an example of a withholding table for a married person paid monthly. Notice that the withholding amounts are different than those we saw for a single employee paid weekly. There are also special withholding tables for employees paid biweekly. 9-38

Cecilia Wu is married, claims two withholding allowances, and earned $560 for the week.
The tax to withhold is $30; this is where the row and column intersect. For Cecilia Wu, $30 is withheld from her paycheck for federal income tax. Go to the table for married persons paid weekly. Find the line covering wages between $560 and $570. 3. Find the column for two withholding allowances. Atef Abuelaish

5) Other Deductions Required by Law
Most states and some local governments require employers to withhold state and local income taxes from earnings. In some states employers are also required to withhold unemployment tax or disability taxes. The procedures are similar to those for federal income tax withholding. Apply the tax rate to the earnings, or use withholding tables. Most states and some local governments require employees to withhold state and local income taxes as well. Atef Abuelaish

Voluntary Deductions There are many payroll deductions not required by law but made by agreement between the employee and the employer. Some examples are: Group life insurance Group medical insurance Company retirement plans Bank or credit union savings plans or loan repayments United States savings bonds purchase plans Stocks and other investment purchase plans Employer loan repayments Union dues Can you think of any other types of deductions which you could voluntarily have withheld from your paycheck? Atef Abuelaish

Enter gross earnings, deductions, and net pay in the payroll register.
PAYROLL REGISTER WEEK BEGINNING January 1, 2016 NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW STATUS EARNINGS HRS. Martinez, Alicia M Rodriguez, Jorge S Dunlap, George S Wu, Cecil M Booker, Cynthia S (A) (B) (C) (D) (E) Objective 6 is to enter gross earnings, deductions, and net pay in the payroll register. A payroll register is a record of payroll information for each employee for the pay period. Alicia Martinez has one withholding allowance and she is married. She worked 40 hours this week and is paid $10 per hour. Enter the employee’s name (Column A), number of withholding allowances and marital status (Column B), and rate of pay (Column E). Atef Abuelaish

Completing the Payroll Register
PAYROLL REGISTER WEEK BEGINNING January 1, 2016 NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW STATUS EARNINGS HRS. Martinez, Alicia M Rodriguez, Jorge S Dunlap, George S Wu, Cecil M Booker, Cynthia S (A) (B) (C) (D) (E) Since this is the first payroll period for the year, there are no cumulative earnings prior to the current pay period. This figure is needed to determine whether the employee has exceeded the earnings limit for the FICA (the Social Security portion) as well as FUTA and SUTA taxes. In later payrolls, this column will accumulate the year to date earnings. The Cumulative Earnings column (Column C) shows the total earnings for the calendar year before the current pay period. Since this is the first payroll period for the year, there are no cumulative earnings prior to the current pay period. Atef Abuelaish

AND ENDING January 6, PAID January 8, 2016 TAXABLE WAGES DEDUCTIONS NAME SOCIAL MEDICARE FUTA SOCIAL MEDICARE SECURITY SECURITY Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia 2, , , (A) (J) (K) (L) (M) (N) Alicia Martinez’s social security taxable wages are $400 and her wages subject to Medicare are also $400. Her wages subject to FUTA tax is $400. The amount withheld from her paycheck for social security is $24.80 and Medicare withheld is $5.80. The Taxable Wages columns shows the earnings subject to taxes for social security (Column J), Medicare (Column K), and FUTA (Column L). Only the earnings at or under the earnings limit are included in these columns. Atef Abuelaish

AND ENDING January 6, PAID January 8, 2016 DEDUCTIONS NAME SOCIAL MEDICARE INCOME HEALTH SECURITY TAX INSURANCE Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia (A) (M) (N) (O) (P) Income tax withheld for Alicia is $ She had no health insurance withheld. The Deductions columns show the withholding for social security tax (Column M), Medicare tax (Column N), federal income tax (Column O), and medical insurance (Column P). Atef Abuelaish

AND ENDING January 6, PAID January 8, 2016 DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO SALARIES WAGES Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , ,767.50 (A) (O) (P) (Q) (R) (S) (T) After all of the deductions, Alicia Martinez’ net pay check is $ After the payroll register is completed, the columns are totaled and the register is proven. Subtract the deductions (Columns M, N, O, and P) from the gross earnings (Column H). Enter the results in the Net Amount column (Column Q). This is the amount paid to each employee. Atef Abuelaish

Payroll Register Payroll Register Continued……
A payroll register is often used to keep a record of pay period dates, hours worked, gross pay, deductions, and net pay of each employee for each pay period. On this slide is an illustration of the payroll register for Phoenix Sales and Services as of January 7, For each employee, the register includes whether they are single (S) or married (M) and the number of withholding allowances they chose on their Form W-4. This information is used with each employee’s gross pay, and the withholding from Circular E, to determine the correct amount of tax to withhold for federal income taxes. The state tax rate for this example is 8% of the federal taxes withheld. The payroll register also reports the gross pay used to compute Social Security, Medicare and the employer’s unemployment taxes. These amounts may be different. For example, once an employee has earned at least $7,000 during a year, the employer stops paying unemployment tax for that employee. (We discuss employer payroll taxes, including unemployment, in the next chapter.) The employer also stops withholding Social Security tax for any employee who has earned at least $106,800 during the year. 9-47

Chapter 10 Payroll Computations, Records, and Payment Section 3: Recording Payroll Information Section Objectives The third section of the chapter demonstrates how to record payroll information for the pay period. The seventh objective of the chapter explains how to journalize payroll transactions in the general journal. 10-7 Journalize payroll transactions in the general journal. 10-8 Maintain an earnings record for each employee. Atef Abuelaish

Recording Payroll Recording Payroll
Journalize payroll transactions in the general journal. Recording Payroll Recording Payroll Recording payroll information involves two separate entries: Record the payroll expense. Pay the employees. It is now time for us to journalize the payroll and the withholdings. We will journalize the payroll transactions in the general journal, although they could be journalized in the cash payments journal instead. We use the totals in the payroll register columns as the basis for our general journal entry to record the payroll. We will make two separate journal entries. Atef Abuelaish

AND ENDING January 6, 2013 PAID January 8, 2013
DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO SALARIES WAGES Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , ,767.50 (A) (O) (P) (Q) (R) (S) (T) The information in the register is used for recording the payroll expense GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST DEBIT CREDIT REF. 20-- Jan The information in the payroll register is used to create the journal entry to record the payroll. Take a moment to review where the debits to the various salaries and wages expense come from. Office Salaries Expense Shipping Wages Expense ,767.50 Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Health Insurance Premiums Payable Salaries and Wages Payable ,840.56 Atef Abuelaish Payroll for week ending Jan. 6

A separate liability account is set up for each deduction
AND ENDING January 6, PAID January 8, 2016 DEDUCTIONS NAME SOCIAL MEDICARE INCOME HEALTH SECURITY TAX INSURANCE Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia (A) (M) (N) (O) (P) Each type of deduction is credited to a separate liability account. A separate liability account is set up for each deduction GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST DEBIT CREDIT REF. 20-- Jan Each Deduction is recorded as a credit to the appropriate liability account. Office Salaries Expense Shipping Wages Expense ,767.50 Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Health Insurance Premiums Payable Salaries and Wages Payable ,840.57 Atef Abuelaish Payroll for week ending Jan. 6

Paying Employees Most businesses pay their employees by check or by direct deposit. By using these methods, the business avoids the inconvenience and risk involved in dealing with currency. Almost all businesses pay salaries/wages of employees by check or by direct deposit. Atef Abuelaish

Paying by Check Paychecks may be written on
the firm’s regular checking account, or a payroll bank account. Our next journal entry records the actual disbursement of paychecks to the employees. Some businesses set up a separate payroll account to further protect their Cash account. Cash is credited for the net take-home pay. Atef Abuelaish

Checks Written on a Separate Payroll Account
Many businesses write payroll checks from a separate payroll bank account. This is a two-step process. A check is drawn on the regular bank account for the total amount of net pay and deposited in the payroll bank account. Individual payroll checks are issued from the payroll bank account. If a business uses a separate payroll checking account, then the payment process has two steps. A check is drawn on the regular bank account for the total amount of net pay and deposited in the payroll bank account. Individual payroll checks are issued from the payroll bank account. Atef Abuelaish

Paying by Direct Deposit
A popular method of paying employees is the direct deposit method. The bank electronically transfers net pay from the employer’s account to the personal account of the employee. On payday the employee receives a statement showing gross earnings, deductions, and net pay. The bank electronically transfers net pay from the employer’s account to the personal account of the employee. On payday, the employee receives a statement showing earnings, deductions, net pay, and the date of deposit. Atef Abuelaish

Maintain an earnings record for each employee.
QUESTION: What is an individual earnings record? An individual earnings record (also called a compensation report) is a record that contains information needed to compute earnings and complete tax reports. ANSWER: Employers must maintain individual earnings information in an individual earnings record. An individual earnings record is a record that contains information needed to compute earnings and complete tax reports. This information includes the employee’s name, address, social security number, date of birth, number of withholding allowances claimed, rate of pay, and any other information necessary to compute earnings and complete the required tax reports. Atef Abuelaish

Totaled monthly earnings
The earnings records are totaled monthly and at the end of each calendar quarter. This provides information needed to make tax payments and file tax returns. By the end of the month, Alicia Martinez had earned gross wages of $1,600. The earnings records are totaled monthly and at the end of each calendar quarter. This provides information needed to make tax payments and file tax returns. Totaled monthly earnings Atef Abuelaish

Chapter 11 Payroll Taxes, 11 Chapter

Payroll Taxes, Deposits,
Chapter Chapter 11 11 Payroll Taxes, Deposits, Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Payroll Taxes, Deposits, and Reports
Chapter Chapter 11 11 Payroll Taxes, Deposits, and Reports Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Accounting: The Language of Business
Meet NO. Dates Chapter Topic Homework Assignment 1 08/23 Accounting: The Language of Business 2 08/25 Using Connect – 10 Questions & LS for 20 Points. 3 08/30 Analyzing Business Transactions 4 09/01 Using Connect – 4 Questions & LS for 30 Points. 5 09/06 Analyzing Business Transactions Using T Accounts 6 09/08 Using Connect – 5 Questions & LS for 50 Points. 7 09/13 Quiz # 1 CH Using Connect – 8 Questions for 25 Points. Atef Abuelaish

The General Journal and The General Ledger 9 09/20
Meet NO. Dates Chapter Topic Homework Assignment 8 09/15 4 The General Journal and The General Ledger 9 09/20 Using Connect – 3 Questions & LS for 50 Points. 10 09/22 REV. / EXAM 1 EXAM $ 01 CH 1 - 3 Using Connect – 14 Questions for 50 Points. 11 09/27 5 Adjustments and Worksheet Using Connect – 4 Questions & LS for 50 Points. 12 09/29 Using Connect – 10 Questions for 25 Points. Quiz # 2 CH 13 10/04 6 Closing Entities and The Postclosing Trial Balance 14 10/06 Using Connect – 5 Questions & LS for 50 Points. Atef Abuelaish

Using Connect – 30 Questions for 90 Points.
Meet NO. Dates Chapter Topic Homework Assignment 15 10/11 MT MID TERM EXAM CH 1 - 5 Using Connect – 30 Questions for 90 Points. 16 10/13 7 Accounting for Sales, Accounts Receivable, and Cash Receipts 17 10/18 Using Connect – 6 Questions & LS for 50 Points. 18 10/20 8 Accounting for Purchases, Accounts Payable, and Cash Payments Using Connect – 5 Questions & LS for 50 Points. 19 10/25 Using Connect – 15 Questions for 25 Points. Quiz # 3 CH 20 10/27 9 Cash 21 11/01 Atef Abuelaish

Meet NO. Dates Chapter Topic Homework Assignment 22 11/03 10 Payroll Computations, Records, and Payment 23 11/08 Using Connect – 7 Questions & LS for 50 Points. 24 11/10 REV. / EXAM 2 EXAM # 2 CH 6 - 8 Using Connect – 15 Questions for 50 Points. 25 11/015 11 Payroll Taxes, Deposits, and Reports 26 11/17 27 11/22 12 Accruals and The Worksheet Using Connect – 4 Questions & LS for 50 Points. 28 11/24 NO CLASS THANKSGIVING HOLIDAY Atef Abuelaish

Accruals and The Worksheet Using Connect – 10 Questions for 25 Points.
Meet NO. Dates Chapter Topic Homework Assignment 29 11/29 12 Accruals and The Worksheet Using Connect – 10 Questions for 25 Points. Quiz # 4 CH 30 12/01 13 Financial Statements and Closing Procedures 31 12/06 Using Connect – 3 Questions & LS for 50 Points. 32 12/08 FINAL COURSE FINAL EXAM Chapters 01 TO 13 Using Connect – 31 Questions for 100 Points. in class from 8 to 11 AM Atef Abuelaish

Chapter 11 Payroll Taxes, Deposits, and Reports Section 1: Social Security, Medicare, and Employee Income Tax Section Objectives 11-1 Explain how and when payroll taxes are paid to the government. 11-2 Compute and record the employer’s social security and Medicare taxes. 11-3 Record deposit of Social Security, Medicare, and employee income taxes. 11-4 Prepare an Employer’s Quarterly Federal Tax Return, Form 941. 11-5 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Chapter 10 discussed federal taxes that are paid by the employee. Chapter 11 discusses employers’ payroll taxes and explains how to complete and file the required tax returns and reports. Section one introduces social security, Medicare and employee income tax. Our first objective of the chapter explains how and when payroll taxes are paid to the government.

Who Deposits Payroll Taxes
Explain how and when payroll taxes are paid to the government. Who Deposits Payroll Taxes Employers make tax deposits for Federal income tax withheld from employee earnings. Employees' share of social security and Medicare taxes withheld from earnings. Employer's share of social security and Medicare taxes. The payroll register is the source of information about wages subject to payroll taxes. Individuals pay taxes, but businesses also pay payroll taxes for social security, Medicare, and unemployment. Employers, regardless of size, must remit payroll tax payments via the EFTPS (Electronic Federal Tax Payment System.) Employers, regardless of size, must remit payroll tax payments via EFTPS (Electronic Federal Tax Payment System.)

The frequency of deposits depends on:
Electronic filing of taxes is now required in most instances. The frequency of deposits depends on: The amount of tax liability, and The amount reported in the lookback period The frequency of deposits depends on the amount of tax liability, and the amount reported in the lookback period. The amount currently owed is compared to the tax liability threshold. For simplicity, this text uses $2,500 as the tax liability threshold. For simplicity this textbook uses $2,500 as the tax liability threshold. The lookback period is a four-quarter period ending on June 30 of the preceding year.

Is the amount owed less than $2,500?
Yes No The payment is due quarterly with the filing of Form 944 annually. The frequency of payments schedule is determined from the total taxes reported during the lookback period. If the amount owed is less than $2,500 then the frequency of payments schedule is determined from the total taxes reported during the lookback period. In this case, Form 941 must be filed quarterly.

Is the amount reported in the lookback period less than or equal to $50,000?
Yes No The employer is subject to the Monthly Deposit Schedule Rule. The employer is subject to the Semiweekly Deposit Schedule Rule. For new employers with no lookback period, if the amount owed is $2,500 or more, payments are due under the Monthly Deposit Schedule Rule. If the amount reported in the lookback period is less than or equal to $50,000, then the employer must make monthly deposits of withholdings. If the total accumulated tax liability reaches $100,000 or more on any day, a deposit is due on the next banking day.

Compute and record the employer’s social security and Medicare taxes.
Remember that both employers and employees pay social security and Medicare taxes Employee Employer (Withheld) (Matched) Social security $ $139.35 Medicare $ $171.94 The employer will match the employees social security of $ and the Medicare tax of $32.59. Total $343.88

Record Employer’s Payroll Taxes
Expense Social Security Tax Payable Medicare Tax Payable 171.94 139.35 32.59 The information on the payroll register is used to record the payroll taxes expense. When the employer records his portion of taxes owed, he debits Payroll Tax Expense, NOT Wages Expense. Payroll Tax Expense is debited for $ and Social Security Tax Payable is credited for $ and Medicare Tax Payable is credited for $ Here is how the transaction would be recorded in the T accounts.

The tax liability which will be deposited is $1,995.52.
Record deposit of social security, Medicare, and employee income taxes. At the end of January, the accounting records for Tomlin Furniture Company looked like this: Employee Employer (Withheld) (Matched) Total Social security $ $ $1,114.80 Medicare Federal income tax Remember, that the Tomlin Furniture Company must make monthly deposits of payroll taxes via EFTPS either online or via the telephone. The tax liability which will be deposited is $1, Total $1, $ $1,995.52 The tax liability which will be deposited is $1,

Payroll Tax Deposit Social Security Tax Payable Medicare Tax Payable
Employee Income Tax Payable Cash 260.72 620.00 When the deposit is made, Social Security Tax Payable is debited for $1,114.80, Medicare Tax Payable is debited for $260.72, Employee Income Tax Payable is debited for $ and the Cash account is credited for the total amount of $1, Here is the transaction entered into the T accounts. The entry to record the payment of the tax can be made in the general journal or the cash payments journal.

At the end of each quarter, the individual earnings records are totaled. This involves adding the columns in the Earnings, Deductions, and Net Pay sections. The individual earning records were updated at the end of each of the four pay periods using information in the payroll registers. Remember to cross foot the totals to insure that Earnings less Deductions equals net pay.

Prepare an Employer’s Quarterly Federal Tax Return, Form 941.
When to File Form 941 The due date for Form 941 is the last day of the month following the end of each calendar quarter. If the taxes for the quarter were deposited when due, the due date is extended by 10 days. At the end of the quarter, the employer must prepare a Form 941. A Form 941 is a federal tax return which reports the amount of social security, Medicare tax and federal income tax that is owed on employees total quarterly earnings. Form 941 verifies the employer’s compliance with applicable laws relating to federal income tax withholding, social security tax, and Medicare tax. It also verifies total taxes owed and paid by the employer on a quarterly basis. The due date for Form 941 is the last day of the month following the end of each calendar quarter.

Completing Form 941 The remainder of the form is completed using the data on the quarterly summary earnings records. (See Table 11.1 in text for an example.) Take a moment to review the lines or fields on the first page of the form. The due date for Form 941 is the last day of the month following the end of each calendar quarter. Total wages paid during the quarter is taken from the quarterly summary earnings records. (Actual forms for 2016 will look different and can be downloaded from the IRS’s website.)

Objective 11-5 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Employers provide a Wage and Tax Statement, Form W-2, to each employee by January 31 of the following year. Form W-3 is due by the last day of February following the end of the calendar year.

Wage and Tax Statement, Form W-2
Alicia Martinez earned gross wages of $20,800 during the period which is reported in box 1 of the form W-2. She had $988 of federal income tax withheld which is reported in box 2 of the W-2.

Transmittal of Wage and Tax Statements, Form W-3
The amounts on Form W-3 must equal the sums of the amounts on the attached Forms W-2. A Form W-3 is another of the annual tax reports that employers must complete and file with the IRS. Form W-3 verifies the company’s total social security tax withheld; total wages, tips, and other compensation; total federal income tax withheld; and other information for the year. The amounts on Form W-3 must be the same as the totals of the Forms W-2 and the four quarterly Forms 941 filed by the employer. 11-87

Chapter 11 Payroll Taxes, Deposits, and Reports Section 2: Unemployment Tax and Workers’ Compensation Section Objectives Section 2 discusses Unemployment Tax and Workers’ Compensation. Objective 6 discusses how to compute and record liability for federal and state unemployment taxes and record payment of the taxes. 11-6 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. 11-7 Prepare an Employer’s Federal Unemployment Tax Return, Form or 940-EZ. 11-8 Compute and record workers’ compensation insurance premiums.

Federal and State Unemployment Rates
The federal government allows a credit (reduction) in the federal unemployment tax for amounts charged by the state for unemployment taxes. SUTA = state unemployment tax FUTA = federal unemployment tax The unemployment insurance program is a federal program that encourages states to provide unemployment insurance for employees working in the state. The FUTA rate is 6.2% but a business may receive a credit of state unemployment taxes paid up to a credit amount of 5.4%, so the FUTA rate is reduced to .6% or State unemployment tax (SUTA) rates differ from state to state and from employer to employer within each state. An employer’s SUTA rate is based on his merit rating or experience rating which the state has assigned. Under the experience rating system, the state tax rate may be reduced to less than 1 percent for businesses that provide steady employment. As long as the business pays its state unemployment taxes ON TIME, it will receive the full credit of 5.4% applied to the Federal FUTA rate of 6.2% yielding a net FUTA rate of .8% (.008.)

Federal and State Unemployment Taxes
Objective 11-6 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Let’s see how Tomlin Furniture Company records its federal and state unemployment tax liabilities.

On Line Furnishings The unemployment taxes for the payroll period ending January 6 are as follows. Federal unemployment tax ($2, x 0.006) = $13.49 State unemployment tax ($2, x 0.040) = Total unemployment taxes = $103.39 GENERAL JOURNAL PAGE 1 POST. DATE DESCRIPTION REF DEBIT CREDIT Jan Payroll Taxes Expense Federal Unemployment Tax Payable State Unemployment Tax Payable Unemployment taxes on weekly payroll Two additional liability accounts are created.

Payment of payroll taxes
When the amount of tax due in Employer’s Quarterly Report is paid, then the liability accounts are debited and cash is credited. In this case, the SUTA tax is paid. GENERAL JOURNAL PAGE Post Ref Description Debit Credit Date Tomlin Furniture Company submits the for SUTA. Apr State Unemployment Tax Payable Cash Paid SUTA taxes for quarter ending March 31

Earnings in Excess of Base Amount
In this textbook example, state unemployment tax is paid on the first $7,000 of annual earnings for each employee. See the next slide for details. State unemployment tax is paid on the first $7,000 of annual earnings for each employee. Earnings over $7,000 are not subject to state unemployment tax. Each state sets its own limit. For our purposes, we have selected a state with a $7,000 limitation in annual earnings for each employee. See the next slide for details.

Earnings over $7,000 are not subject to state unemployment tax.
Earnings Cumulative Taxable Earnings Earnings January $ 2, $2, $2,240 February , , ,480 Mar, week , , ,720 Mar, week , ,000 Unemployment taxes are levied on the first $7,000 for each employee. For this example, let’s assume that Cecelia Wu earns $560 every week. In the four weeks of January, February and March, she earned $2,240. ($560 X 4.) In the fifth week of March she earned the same $560, but only some of those earnings, $280 in this case, would be subject to taxes. ($7,000 earnings maximum less the $6,720 in earnings to date.) This applies to each employee individually.

Depositing Federal Unemployment Taxes
Federal unemployment tax deposits must be made electronically. Currently this is the only option available. Electronic deposits are made using EFTPS (previously described.) Deposits are made quarterly and are due on the last day of the month following the end of the quarter. Most employers, regardless of size, must now remit payroll tax payments via EFTPS. Federal unemployment tax deposits must be made electronically. Most employers, regardless of size, must remit payroll tax payments via Electronic Federal Tax Payment System or EFTPS

Federal Unemployment Taxes
The federal unemployment tax is calculated at the end of each quarter. It is computed by multiplying the first $7,000 of each employee's wages by A deposit is required when more than $500 of federal unemployment tax is owed. If $500 or less is owed, no deposit is required. The federal unemployment tax is calculated at the end of each quarter. If $500 or less is owed, no deposit is due.

Prepare an Employer’s Federal Unemployment Tax Return.
QUESTION: What is Form 940 or 940-EZ? ANSWER: Form 940 or 940-EZ is the Employer’s Annual Federal Unemployment Tax Return form. It is a preprinted government form. Another payroll tax report which needs to be submitted to the federal government is the Employer’s Federal Unemployment Tax Return, Form 940. Employers report Federal Unemployment Taxes collected, only once a year on the Employer’s Annual Federal Unemployment Tax Return, Form 940 or 940-EZ. Recall that the Form 941 form was due quarterly, but the Form 940 is due only once per year.

Line 3 shows the total compensation paid to employees.
Line 3 shows that $116,870 of wages was earned by employees during the year. The form for 2016 will most likely differ from the above. Current forms can be downloaded from the IRS’s website. In this case, no deposits have been recorded thus far as the payroll liability was less than $500. Line 8 shows the total federal unemployment tax paid.

Compute and record workers’ compensation insurance premiums.
Workers' compensation provides benefits for employees who are injured on the job. The insurance premium, which is paid by the employer, depends on the risk involved with the work performed. Workers’ compensation insurance is the amount that employers have to pay to protect their employees from work-related accidents and injuries. The rate of insurance premiums varies with the risk of the work involved. Worker’s Compensation, or some form of it, is mandatory in substantially all states.

Workers’ Compensation Insurance
There are two ways to handle workers' compensation insurance: Pay an estimated annual premium in advance. Pay a deposit at the beginning of the year and make monthly payments. The method a business uses depends on the number of its employees. Worker’s compensation premiums can be paid on an annual basis in a lump sum payment or through deposits.

Workers’ Compensation Insurance
Tomlin Furniture Company has two work classifications: Office work Shipping work The workers’ compensation premium rates are Office workers $0.45 per $100 of labor costs Shipping workers per $100 of labor costs As you can see, the classification of work greatly affects the amount of premiums.

Payment of Premiums The insurance premium rates recognize that injuries are more likely to occur to shipping workers than to office workers. Based on employee earnings for the previous year, Tomlin Furniture Company paid an estimated premium of $1,000 for the new year. 2016 Jan Based on employee earnings for the previous year, TomlinFurniture Company paid an estimated premium of $1,000 for the new year. Workers’ Compensation Insurance Expense Cash Estimated workers’ compensation insurance for 20--

Calculate Premium payable (or receivable)
Classification Payroll Rate Premium Office work $24, $0.45 per $ $ Shipping work , per $ ,148.88 Total premium for year ,261.20 Less estimated premium paid ,000.00 Balance of premium due $ If the actual premium is more than the estimate, then the employer would submit the balance due to the insurance company. In the example provided above, the company owes an additional premium payment of $

On December 31 the balance due to the insurance company is recorded as a liability by an adjusting entry. Tomlin Furniture Company owes $ ($1, $1,000.00) for the workers' compensation insurance. Dec Workers’ Compensation Insurance Expense 2016 Workers’ Compensation Insurance Payable The balance due to the insurance company of $ is recorded as a liability by an adjusting entry on December 31. If the company had originally estimated too high, then they may be due a refund at the end of the year. Note: An adjusting journal entry will be reported at period end to recognize any additional amounts owed or due back.

Internal Control Over Payroll
1. Assign only highly responsible, well-trained employees to work in payroll operations. 2. Keep payroll records in locked files. Train payroll employees to maintain confidentiality. 3. Add new employees and make all changes in pay rates only with proper written authorization from management. 4. Make changes to an employee's withholding allowances based only on a Form W-4 properly completed and signed by the employee. 5. Make voluntary deductions from employee earnings based only on a signed authorization from the employee. Companies must create and enforce internal control procedures to protect payroll operations. Here are some internal controls that should exist in a firm.

Internal Control Over Payroll
6. Have the payroll checks examined by someone other than the person who prepares them. Compare each check to the entry for the employee in the payroll register. 7. Have payroll checks distributed to the employees by someone other than the person who prepares them. 8. Have the monthly payroll bank account statement received and reconciled by someone other than the person who prepares the payroll checks. Use prenumbered forms for the payroll checks. Maintain files of all authorization forms for adding new employees, changing pay rates, and making voluntary deductions. Also retain all Forms W-4. Review the internal control suggestions. You will notice that there are quite a few controls that a good system will have in place.

Happiness is having all homework up to date
Homework assignment Using Connect – 7 Questions for 50 Points for Chapter 11. Prepare chapter 12 “Accruals and Worksheet.” Happiness is having all homework up to date Atef Abuelaish

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