2. Payroll Computations, Records, and Payment
Chapter 10
Payroll Computations, Records, and Payment
Section 1: Payroll Laws and Taxes
Section Objectives
10-1 Explain the major federal laws relating to employee earnings and withholding.
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.

3. 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.)

4. 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?

5. 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.
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.
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.

6. Social Security Tax
As of 2013
The amount of social security tax is determined by:
rate
6.2%
earnings up to a calendar year earnings base
$ 113,700
The rate (6.2 percent) 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.

7. 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.
The Medicare tax does not have an earnings base limit.
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.

8. 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.)

9. 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.

10. 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.

11. 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.

12. Payroll Computations, Records, and Payment
Chapter 10
Payroll Computations, Records, and Payment
Section 2: Calculating Earnings
and Taxes
Section Objectives
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.
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.

13. Compute Gross Earnings of Employees.
Objective 10-2
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.

14. 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).

15. 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.

16. 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.)

17. Determine employee deductions for Social security tax.
Objective 10-3
Tax-exempt Wages
Earnings in excess of the base amount ($113,700 as of 2013) 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.

18. Medicare Tax Determine employee deduction for Medicare tax.
Objective 10-4
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.

19. Determine employee deductions for income tax.
Objective 10-5
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.

20. 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).

21. 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.

22. 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.

23. 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.
Find the column for two withholding allowances.

24. 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.

25. 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?

26. Enter gross earnings, deductions, and net pay in the payroll register.
Objective 10-6
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)
Enter the employee’s name (Column A), number of withholding allowances and marital status (Column B), and rate of pay (Column 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.

27. 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)
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.
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.

28. Completing the Payroll Register
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)
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.
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.

29. Completing the Payroll Register
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)
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).
Income tax withheld for Alicia is $ She had no health insurance withheld.

30. Completing the Payroll Register
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)
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.
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.

31. Payroll Computations, Records, and Payment
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.

32. Journalize payroll transactions in the general journal.
Objective 10-7
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.

33. 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
Office Salaries Expense
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.
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
Payroll for week ending Jan. 6

34. 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
Office Salaries Expense
Each Deduction is recorded as a credit to the appropriate liability account.
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
Payroll for week ending Jan. 6

35. 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.

36. 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.

37. 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.

38. 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.

39. Maintain an earnings record for each employee.
Objective 10-8
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.

40. 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

41. College Accounting, 3rd Edition
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