1. Payroll Accounting
Chapter 12

2. Calculating Gross Earnings
Using a Payroll System
Payroll is a list of the employees and the payments due to each employee for a specific pay period.
Pay period is the amount of time over which an employee is paid.
Weekly
Biweekly
Semimonthly
Monthly
A payroll system:
Collects and processes all information needed to prepare and issue payroll checks
Generates payroll records for accounting and reporting purposes
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3. Payroll Clerks
Businesses with many employees often hire a payroll clerk. Their responsibilities usually include:
Making sure employees are paid on time
Making sure each employee is paid the correct amount
Completing payroll records
Submitting payroll reports
Paying payroll taxes
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4. Computing Gross Pay
Gross Earnings (pay) – the total amount of money earned by an employee for time spent working during a pay period. Accountants refer to this as Salary Expense
Salary
Hourly Wage
Commission
Salary plus commission or bonus
Piece rate
*Some employees are entitled to overtime pay
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5. Salary
Salary – a fixed amount of money paid for a fixed amount of time regardless of the number of hours worked in that time period
Many managers are paid salary and expected to get a certain amount of work done within a time period without concern for the amount of time it actually takes to complete it
Ex: Paula earns $2,000 a month. Some months she works 160 hours and some she works 170 hours but still is paid $2,000 for the work that is expected.
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6. Hourly Wage
Wage – an amount of money paid to an employee at a specified rate per hour worked.
The hourly rate is multiplied by the hours worked to come up with a gross pay
Hours are usually recorded in increments of quarters (every 15 minutes) and rounded to the nearest
Ex. $7.25 per hour * hours = $99.69 gross pay
Hours worked are usually recorded on a time card that keeps track of time in and time out of an employee.
Electronic Badge Readers – The employee scans his/her badge and the computer records the time in and out.
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7. Other Methods of Pay
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Commission – an amount paid to an employee based on a percentage of the employee’s sales.
Commission encourages employees to sell more because their compensation is in direct correlation to the amount they sell.
Salary Plus Commission – an employee is paid a set amount and then can earn additional pay based on sales
Piece Rate – manufacturing companies pay employees based on the number of items produced.
Overtime Pay – an additional amount paid to hourly employees when they work more than the legal limit of standard pay. (1.5 x’s hourly rate for any hours over 40 per week.)

8. Payroll Deductions
Deductions – an amount subtracted from gross earnings
Federal Income Tax – a tax based on earnings
Form W-4 – Filled out by the employee to help determine how much money will be deducted.
Marital status
Number of allowances (withholding allowance)
Gross earnings
Withholding Allowance – the more allowance you claim, the less you have deducted
Tax Tables help you determine how much money should be deducted each pay period
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9. W-4 Form
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10. Federal Tax Withholdings Table

11. FICA Taxes FICA Taxes are a set percent of total earnings
Social Security Tax – provides funding to certain individuals
The old and disabled
Survivors of deceased workers
Medicare Tax – finances health insurance benefits for people who are elderly or disabled.
Ex. Social security tax 6.20%
Medicare tax 1.45%
Total FICA taxes 7.65%

12. State and Local Income Taxes
Most states have an income tax in addition to the federal income tax and FICA taxes.
Some communities (cities) have an additional tax in addition to the federal income tax and FICA taxes.

13. Voluntary Deductions
Employers will usually agree to withhold additional amounts from and employee’s check until otherwise notified not to.
Union Dues
Health insurance payments
Life insurance payments
Pension and other retirement contributions
Credit union deposits and payments
U.S. savings bonds and charitable contributions
401(k) plan – a popular voluntary payroll deduction that is a pre-tax retirement contribution.

14. Preparing the Payroll Register
Payroll Register – a form that summarizes information about employee’s earnings for each pay period.
Identification information
Employee’s I.D. number
Name
Marital status
Number of allowances claimed
Total Hours
Rate of pay
Earnings (regular, overtime, total)
Deductions
Net Pay – How much the is left after deductions have been subtracted from Gross Pay
Check number
Totals
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15. Payroll Register
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16. Paying Employees Payroll checks are issued to employees
If a small company then many times employees are paid from the general account
If several employees, most companies will have a separate payroll bank account. The total amount of the payroll is transferred to the payroll account and then checks are issued using the money in that account
Payroll checks have stubs attached showing the gross earnings, deductions and net pay
Direct Deposit – If an employee has direct deposit, then they are give proof of the deposit and a list of deductions
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17. Payroll Stub
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18. The Employee’s Earnings Record
Employee’s Earnings Record is a file on each employee documenting his/her pay and deductions
Accumulated Earnings is also listed on the employee’s earnings record. It is a running total of earnings for the year.
Businesses usually keep these on a quarterly basis and then carry the totals forward to a new record.
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19. Employee’s Earnings Record
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20. Managerial Implications for Payroll Accounting
Wages and salaries are a large part of a company’s expenses.
They should be done with the utmost care
The process should have internal controls to prevent errors
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