1. ANALYZING & JOURNALIZING PAYROLL TRANSACTIONS Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland Developed by Lisa Swallow, CPA CMA MS

2.  Payroll requires entering data (in order) in the following places:  Payroll Register  Employee Earnings Records  General Journal  Journalize gross wages and withholdings  Journalize payroll taxes and workers’ compensation  Journalize period-end accruals  Post to General Ledger

3.  Payroll register lists employees in rows and shows following information for each  Gross wages  Taxes withheld and other deductions  Net pay  Payroll register shows (in columns)  Total of gross wages, each deduction and net  When completed, should “foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number *Use payroll register to journalize*

4.  Employee Earnings Record used to track cumulative totals (wages and taxes)  Enter row of data each pay period  Important because different wage caps for FUTA, SUTA and OASDI taxes  Need to track cumulative totals in order to issue W-2s and do quarterly SUTA reports  Prepare payroll analyses - various internal and external reports

5.  Next screens show how to enter information into accounting system  Gross payroll is debited  Each withholding tax is a liability  Advanced EIC reduces FIT Payable  All other payroll deductions are liabilities as well

6.  Any deduction that the ER makes from EE paycheck goes into a liability account (because they owe it to someone) such as:  Group life insurance premiums  Health insurance premiums  Purchase government savings bonds  Union dues  Deferred compensation (contributions to pension plan)  Child support/other garnishments

7.  A creditor can, through the courts, seek repayment of his/her money by garnishment  Employer is required to comply with garnishment order  ER must withhold funds from EE’s paycheck and submit it to appropriate authorities  Child support (see next slide)  Creditor garnishments limited depending upon state  Administrative wage and student loan garnishments limited to 15% of disposable earnings

8.  Family Support Act of 1988 requires immediate withholding for child- support payments  ER can withhold a state mandated fee for administration  Some states now require electronic submission of garnished child support payments  Maximum amount that can be withheld from a person’s weekly disposable earnings varies according to different support orders, but can be as high as 50-65% of disposable earnings

9.  Pension plans that involve employee contributions result in liability for the employer  Recorded in payroll entry  Pension Protection Act of 2006 gives company ability to automatically enroll EEs in company’s plan and deduct contributions from pay

10.  Cash/check  Electronic payment methods  EFTS (Electronic funds transfer system)  Distribute electronic pay stub  Pay Cards  Cards that allow ER to deposit payroll into prepaid card; card then utilized like debit or credit card  As of 2006, 30 states allow their use  Final pay  Many states set time limit between termination and final wage pay out  CA and MI require immediate payment if EE is fired

11.  Journal Entry #1 - Record gross wages, withholdings and net pay  Journal Entry #2 - Record employer payroll tax expense These two journal entries are always the same in format. You must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example).

12.  Debit Wage Expense for gross payroll  Credit each withholding account - they are all liabilities  Credit cash (or wages payable) for net payroll Journal entry #1 Wage Expense1845.00 OASDI Payable114.39 HI Payable 26.75 FIT Payable174.00 SIT Payable 50.00 Insurance Payable191.00 Cash 1,288.86

13.  Debit Payroll Tax Expense for total of all payroll taxes that ER pays  Credit each account - they are all liabilities Calculate all employer taxes utilizing varying wage bases and percentages Journal entry #2 Payroll Tax Expense188.92 FUTA Payable 1.72 SUTA Payable 46.06 OASDI Payable114.39 HI Payable 26.75

14.  Look in general ledger, in each applicable liability account, for amount due  Deposit 941 taxes Note: Don’t forget to double OASDI and HI  Deposit state income tax  Deposit SUTA

15.  Workers’ compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities  Laws differ by state  Premiums are calculated based on employment classification - per $100 of payroll  Pay premiums in advance based on projected wages  Then, at year-end, report actual wages and pay additional premium  Or may receive credit towards next year

16.  Debit Work Comp. Insurance Expense for premium paid  Credit Cash (if paying) or Insurance Payable (if accruing) Journal entry Workers’ Comp. Insurance Expense99.67 Cash or Insurance Payable99.67

17.  Accrued wages should be recorded for wages earned by workers but not yet paid;  To record unpaid wages Wage Expense 1589.96 Wages Payable1589.96  Accrued vacation pay should be recorded for amount of vacation pay owed employees  Many ER’s now merging sick time and vacation time Vacation Benefits Expense 520.00 Vacation Benefits Payable 520.00

18. Account TitleNormal BalanceType of Account FIT PayableCreditLiability SIT PayableCreditLiability Insurance PayableCreditLiability Union Dues PayableCreditLiability Wages PayableCreditLiability Vacation Benefits Payable CreditLiability

19. Account TitleNormal BalanceType of Account Wage ExpenseDebitExpense Payroll Tax ExpenseDebitExpense Workers’ Compensation Insurance Expense DebitExpense Vacation ExpenseDebitExpense OASDI PayableCreditLiability HI PayableCreditLiability FUTA PayableCreditLiability SUTA PayableCreditLiability