Accounting for Payroll: Employee Earnings and Deductions Chapter 11 © Paradigm Publishing, Inc. 1 Learning Objectives 1. Describe the importance of payroll records. 2. Calculate gross earnings for employees. 3. Explain the nature of payroll deductions. 4. Calculate payroll deductions and net pay. © Paradigm Publishing, Inc. 2 Learning Objectives 5. Complete the payroll register and use it to record and pay the payroll. 6. Make accounting entries for employee earnings and deductions and for payment of the payroll. © Paradigm Publishing, Inc. 3 Learning Objective 1 Describe the importance of payroll records © Paradigm Publishing, Inc. 4 To accumulate the information needed to calculate the pay of each employee for each payroll period To provide information needed to complete the various payroll reports that are required by federal and state regulations © Paradigm Publishing, Inc. 5 The distinction between employees and independent contractors is important. Employees Under the direct control of an employer on a continuing basis Payroll accounting applies © Paradigm Publishing, Inc. 6 Independent Contractor Agrees to perform and complete a specific job or task and is left to determine the ways and methods of achieving that job or task Personally responsible for paying their own taxes © Paradigm Publishing, Inc. 7 Salaried Employee — an individual who works for a fixed amount of pay for a definite period of time, such as a week, a month, or a year Salary — a fixed amount paid to employees for a certain period of time, such as a week, month, or year Hourly Worker — an individual who works for a fixed hourly rate, usually referred to as a wage © Paradigm Publishing, Inc. 8 Establishes standards for Minimum wage Overtime pay Child labor Required payroll record keeping Equal pay for equal work regardless of sex © Paradigm Publishing, Inc. 9 Administered by the Wage and Hour Division of the US Department of Labor Applies only to firms engaged in interstate commerce © Paradigm Publishing, Inc. 10 Employees covered by the Act are guaranteed a minimum wage and overtime pay if they work more than 40 hours in one week Minimum Wage — the lowest hourly rate that can be paid to employees covered by the Act Overtime Pay — a minimum of one and one-half times the regular rate of pay for all hours worked over 40 during a week © Paradigm Publishing, Inc. 11 Example Assume William Heedy earns $17 per hour and worked 48 hours during the current week. His employer is required to pay time-and-a-half for all hours over 40 per week. William’s gross pay for the week would equal: 40 regular hours X $17 = $680 8 overtime hours X $25.50 ($17 x 1.5) = 204 Gross pay $884 © Paradigm Publishing, Inc. 12 Quick Check Peggy Browning earns $14 per hour and worked 50 hours during the current week. Her employer is required to pay time-and-a-half for all hours over 40 per week. Her gross pay for the week would equal a. $700. b. $560. c. $770. d. $1,050. e. $630. © Paradigm Publishing, Inc. 13 Usually factory workers Pays a certain rate for each unit worker completes © Paradigm Publishing, Inc. 14 Example Assume a factory worker is paid $.06 for each unit produced. The employee processed 4,800 units in a given week. The employee’s earnings for that week are calculated as follows: Number of units produced X Rate per unit = Earnings for the period 4,800 X $.06 © Paradigm Publishing, Inc. = $288.00 15 Learning Objective 2 Calculate gross earnings for employees © Paradigm Publishing, Inc. 16 An employee’s earnings before any amount are deducted by the employer. The employee is usually hired for an annual salary; the annual salary is then divided by the number of pay periods in the year. The most common pay periods are weekly, biweekly, semimonthly, and monthly. © Paradigm Publishing, Inc. 17 Example Assuming an employee is hired at an annual salary of $28,080, the gross pay per pay period would be: Type of Pay Period Number of Pay Periods in a Year Gross Earnings per Pay Period Weekly 52 $28,080 ÷ 52 = $540 Biweekly 26 $28,080 ÷ 26 = $1,080 Semimonthly 24 $28,080 ÷ 24 = $1,170 Monthly 12 $28,080 ÷ 12 = $2,340 © Paradigm Publishing, Inc. 18 Review Quiz 11-1 Joy Jackson worked 45 hours this week. Her hourly wage is $8.00, and she receives overtime pay at a rate of time-and-a-half. Calculate her gross earnings. 40 hrs × $8/hr $8/hr × 1.5 $12/hr × 5 hr $320 + $60 = = = = $320 $12/hr $60 $380 © Paradigm Publishing, Inc. 19 Learning Objective 3 Explain the nature of payroll deductions © Paradigm Publishing, Inc. 20 An amount withheld from the pay of an employee May be mandatory or voluntary Mandatory deductions include • Social Security taxes • Federal income taxes • Certain taxes for state and local agencies © Paradigm Publishing, Inc. 21 Voluntary deductions include • Amount for insurance premiums • Charities • Retirement plans • Union dues © Paradigm Publishing, Inc. 22 Learning Objective 4 Calculate payroll deductions and net pay © Paradigm Publishing, Inc. 23 The Federal Insurance Contributions Act (FICA) is used to finance Old-Age, survivors, and Disability Insurance (OASDI) Hospital Insurance (HI) plan, or Medicare Both the employee and the employer contribute equal amounts to the tax. We will concentrate in this chapter on the employee’s share of the tax. © Paradigm Publishing, Inc. 24 The maximum amount of earnings during a calendar year that is subject to OASDI taxes Presently $102,000 Should an employee’s earnings reach or exceed this amount, no additional OASDI taxes will be withheld for the remainder of the year OASDI tax rate = 6.2% © Paradigm Publishing, Inc. 25 No maximum wage base for HI taxes; all earnings are subject to HI regardless of the amount. HI tax rate = 1.45% © Paradigm Publishing, Inc. 26 Assume an employee earns $600 for the current pay period. The cumulative year-to-date earnings for the employee are $15,700. The OASDI and HI taxes withheld from the employee would be: OASDI $600 × .062 = $37.20 HI $600 × .0145 = Total FICA tax 8.70 $45.90 © Paradigm Publishing, Inc. 27 Quick Check Tom Smith earns $3,000 per month. Using the FICA tax rates given in the textbook, Tom’s OASDI and HI taxes for the current month would be, respectively a. $229.50 and $186.00. b. $186.00 and $229.50. c. $43.50 and $229.50. d. $186.00 and $43.50. e. $43.50 and $180.00. © Paradigm Publishing, Inc. 28 Review Quiz 11-2 Employee FICA Earnings before This Pay Period Earnings This Pay Period OASDI A $ 15,400 $ 412 $ 25.54 $ 5.97 B 101,600 1,250 24.80 18.13 C 69,300 825 51.15 11.96 D 32,400 618 38.32 8.96 © Paradigm Publishing, Inc. HI 29 The federal government’s main source of revenue is the income tax imposed on personal incomes. Unless specifically exempted, all income (legal and illegal) is subject to personal income tax. © Paradigm Publishing, Inc. 30 The amount of personal income tax to be withheld depends on three factors: The employee’s gross earnings The employee’s marital status The number of withholding allowances claimed by the employee © Paradigm Publishing, Inc. 31 At the start of a new job, or when personal information changes, an employee is required to complete a W-4 form, which is kept on file by the employer. © Paradigm Publishing, Inc. 32 © Paradigm Publishing, Inc. 33 Uses government-issued tables to compute the amount of federal income tax to be withheld from employees. The process of withholding state income taxes is virtually the same as withholding federal income taxes. State governments also provide tax tables based on an employee’s earnings, pay period, marital status, and number of exemptions. © Paradigm Publishing, Inc. 34 © Paradigm Publishing, Inc. 35 Review Quiz 11-3 Calculate the FICA tax and federal income tax for Joy Jackson. Gross weekly earning is $380 Married Claims zero withholding OASDI = $380 × .062 = $23.56 HI = $380 × 0.145 = 5.51 $29.07 = FICA Federal income tax = $23 © Paradigm Publishing, Inc. 36 Most state governments require an employer to withhold an income tax from earnings of employees. The state income tax is based on an employee’s marital status, the amount of earnings, and the number of withholding allowances claimed. © Paradigm Publishing, Inc. 37 Other deductions include amounts Donated to charities For health and life insurance or union dues Invested in US savings bonds or retirement plans © Paradigm Publishing, Inc. 38 Net earnings is the amount of earnings after all payroll deductions have been made; it is the actual amount of the employee’s paycheck, or take-home pay. © Paradigm Publishing, Inc. 39 Assume Sam Morgan has gross earnings of $360 with the following deductions: OASDI HI Federal income taxes State income taxes Medical insurance deduction Savings bonds deduction Union dues deduction Total deductions $22.32 5.22 8.00 5.00 15.00 10.00 5.00 $70.54 © Paradigm Publishing, Inc. 40 Sam’s net pay is equal to his gross pay less all his deductions: $360 – $70.54 = $289.46 © Paradigm Publishing, Inc. 41 © Paradigm Publishing, Inc. 42 Quick Check Mary Watts earns $3,000 per month. Mary’s federal income tax deduction is $260, her state income tax deduction is $75, and she has $20 deducted for United Way. Using the FICA tax rates given in the textbook, Mary’s net pay for the month is a. $2,479.00. b. $2,435.50. c. $2,645.00. d. $2,415.50. e. $2,770.50. © Paradigm Publishing, Inc. 43 Review Quiz 11-4 What is the amount of Joy Jackson’s net earnings? Gross Earnings $380.00 Less Deductions: FICA — OASDI FICA — HI $23.56 5.51 Federal income tax 23.00 State income tax 11.40 Medical insurance 15.00 Savings bonds 25.00 Total Deductions Net Earnings 103.47 $276.53 © Paradigm Publishing, Inc. 44 Learning Objective 5 Complete the payroll register and use it to record and pay the payroll © Paradigm Publishing, Inc. 45 To provide management with up-to-date payroll information and to comply with various federal, state, and local laws, an employer must maintain payroll records that will supply the following information for each employee: Name, address, and Social Security number The amount of gross earnings for each payroll © Paradigm Publishing, Inc. 46 The period of employment covered by each payroll The year-to-date gross earnings The amount of taxes and other deductions The date each payroll was paid © Paradigm Publishing, Inc. 47 A summary of the gross earnings, deductions, and net pay for all employees for a specific payroll period. © Paradigm Publishing, Inc. 48 The Status column shows the employee’s marital status and the number of withholding allowances being claimed by the employee. © Paradigm Publishing, Inc. 49 The employee’s year-to-date earnings before this payroll are recorded in the Cumulative Earnings column. © Paradigm Publishing, Inc. 50 The Unemployment column shows the amount of earnings on which the employer will pay unemployment taxes. As we will learn in chapter 12, employers pay federal unemployment taxes on the first $7,000 earned by each employee during the year. © Paradigm Publishing, Inc. 51 These amounts are not taxes, but amounts subject to the tax rates. © Paradigm Publishing, Inc. 52 © Paradigm Publishing, Inc. 53 These columns show the amounts withheld from the pay of employees. © Paradigm Publishing, Inc. 54 Take-home pay © Paradigm Publishing, Inc. 55 © Paradigm Publishing, Inc. 56 A record maintained for each employee that contains basic employee information and a summary of payroll data for that employee. © Paradigm Publishing, Inc. 57 © Paradigm Publishing, Inc. 58 Manual system The payroll register is prepared first, and the information is transferred to the employee’s earnings record. A totally manual payroll system is rare today. © Paradigm Publishing, Inc. 59 Computerized system Increase processing speed and accuracy Generate payroll reports automatically Can save the payroll personnel hours of tedious, repetitive payroll calculations © Paradigm Publishing, Inc. 60 Learning Objective 6 Make accounting entries for employee earnings and deductions and for payment of the payroll © Paradigm Publishing, Inc. 61 Provides all the information necessary to record the payroll Can use as a special journal and post the column totals directly to the ledger Can use as an information source for recording the payroll in either the general journal or the cash payments journal In recording employee earnings and the deductions from earnings, separate accounts should be maintained for the earnings and for each deduction © Paradigm Publishing, Inc. 62 An operating expense account used to record the gross amount of the payroll Expense accounts are always debited to show an increase. © Paradigm Publishing, Inc. 63 A liability account used to record the amount of OASDI tax withheld from the earnings of employees and is also used to record the liability for the employer’s share of OASDI taxes Credited when OASDI taxes are withheld Debited when OASDI taxes are sent in © Paradigm Publishing, Inc. 64 Liability accounts are always credited to show an increase and debited to show a decrease. © Paradigm Publishing, Inc. 65 A liability account used to record The amount of HI (Medicare) tax withheld from the earnings of employees The liability for the employer’s share of HI taxes Credited when HI taxes are withheld Debited when HI taxes are sent in © Paradigm Publishing, Inc. 66 © Paradigm Publishing, Inc. 67 A liability account used to record the amount of federal income taxes withheld from the earnings of employees Credited when income taxes are withheld Debited when the taxes are sent in © Paradigm Publishing, Inc. 68 © Paradigm Publishing, Inc. 69 Recorded in an appropriate liability account State income tax withheld — in the State Income Tax Payable account Union dues withheld — in the Union Dues Payable account These accounts, and similar liability accounts Credited when amounts are withheld Debited when payment is made to the appropriate agency © Paradigm Publishing, Inc. 70 20X3 1 Nov. 18 Sales Salaries Expense 205500 1 Office Salaries Expense 140900 2 2 © Paradigm Publishing, Inc. The gross amount of the payroll is recorded in the Sales and Office Salaries Expense accounts. 71 20X3 1 Nov. 18 Sales Salaries Expense 205500 1 Office Salaries Expense 140900 2 2 13944 3 5023 4 Federal Income Tax Payable 34100 5 6 State Income Tax Payable 13212 6 7 Medical Insurance Payable 6900 7 8 Savings Bonds Payable 5500 8 9 Union Dues Payable 1500 9 3 FICA Tax Payable - OASDI 4 FICA Tax Payable - HI 5 © Paradigm Publishing, Inc. Each amount withheld is recorded in a liability account. 72 20X3 1 Nov. 18 Sales Salaries Expense Office Salaries Expense 2 3 4 5 FICA Tax Payable - OASDI FICA Tax Payable - HI Federal Income Tax Payable 6 State Income Tax Payable 7 8 Medical Insurance Payable 9 10 11 Savings Bonds Payable Union Dues Payable Salaries Payable Recorded payroll of November 18. 205500 1 140900 2 13944 5023 34100 3 4 5 13212 6900 6 5500 8 7 1500 9 266221 10 11 The net amount of the payroll is recorded in the Salaries Payable account. The Cash account would be credited if payment were made immediately. However, recording the net amount in the Salaries Payable account allows the payroll to be recorded before the paychecks are prepared. © Paradigm Publishing, Inc. 73 © Paradigm Publishing, Inc. 74 Review Quiz 11-5 Information from the payroll register of Northwest Company for the payroll period ended February 6, 20X3, is shown on page 524. The following is the general journal entry necessary to record employee earnings and deductions. © Paradigm Publishing, Inc. 75 - liability - asset © Paradigm Publishing, Inc. 76 1. Record the payroll information in the payroll register. 2. Use the payroll register as an information source to record a journal entry for employee earnings and deductions. 3. Record a journal entry for payment of the payroll. © Paradigm Publishing, Inc. 77 Review Quiz 11-6 The following is the entry to record the payment of the payroll from Review Quiz 11-5. © Paradigm Publishing, Inc. 78 Focus on Ethics Refer to the Focus on Ethics box on page 526 in your text. What internal control procedures could the owner have instituted to prevent this type of scheme? © Paradigm Publishing, Inc. 79 Joining the Pieces Procedures for Recording the Payroll © Paradigm Publishing, Inc. 80