Payroll Accounting 2013
Bernard J. Bieg and Judith A. Toland
CHAPTER 5
CHAPTER 1
THE NEED FOR PAYROLL & PERSONNEL
RECORDS
Developed by Lisa Swallow, CPA CMA MS
Learning Objectives
• Identify various laws that affect employers in their payroll
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operations
Examine the recordkeeping requirements of these laws
Describe employment procedures generally followed in a Human
Resources Department
Recognize the various personnel records used by businesses and
outline the type of information shown on each form
Identify the payroll register and the employee’s earnings record
Payroll Profession
• Positions within payroll profession range from payroll
clerk to senior payroll manager
•
Job responsibilities increasing – average payroll clerk salary
is $37,000
• Need to keep current
• Professional membership – American Payroll Association
(APA)
• “Code of Ethics” sets direction for profession (Figure 1-1)
•
Subscribe to Payroll Guide, a biweekly publication
LO-1
Payroll Profession
• Payroll Accounting System are governed by the federal, state,
and local laws and regulation.
• Rules are established to determine who is an employee, time
worked, overtime pay, deductions, pay period, and when
taxes need to be paid.
• Lack of compliance will result in fines and back-pay.
Payroll Profession
• Job responsibilities of the payroll personnel:
1. Time-worked data
2. Pay rate changes
3. Tax rate changes
4. Employee-authorized payroll deductions
5. New employee information
6. Marital and employee allowances changes
Many Laws Affect Payroll
• Fair Labor Standards Act (FLSA)
• Federal Insurance Contribution Act (FICA)
• Income tax withholding laws
•
Federal, state and local
• Unemployment tax acts
• Fair employment laws
• Other federal laws
• State minimum wage and maximum hour laws and other
state specific laws
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Fair Labor Standards Act (FLSA)
• Federal Wage & Hour Law of 1938
• Minimum wage is $7.25/hour
• Equal pay for equal work provisions
• Display poster
• States Min. wage and Max. hour laws
• Sets law for companies involved
In interstate commerce
or
• In production of goods/services for
interstate commerce
• Requires payroll records be maintained
•
Covered in greater detail in Chapter 2
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Federal Insurance
Contributions Act (FICA)
• Comprised of two taxes
• Both taxes paid by employer and employee
•
OASDI (Old Age & Survivors’ Trust Fund & Federal
Disability Insurance Trust)
HI (Health Insurance Plan - Medicare)
Tax on self employed individual (Self-Employment Contribution Act
(SECA)
Making payment to social security beneficiary
•
Covered in greater detail in Chapter 3
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Income Tax Withholding Laws
• Federal income tax
• Levied on earnings of employees
• Income tax is withheld from paychecks
• State and local income tax
• Income tax is withheld from paychecks
• Different in each state
• Not all states have state income tax
Covered in greater detail in Chapter 4
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Unemployment Tax Acts
• FUTA (Federal Unemployment Tax Act)
• Employer tax – paid on $7,000 (per employee per year)
• Taxes used to pay state and federal administrative expenses, not used
to pay unemployment benefits
• SUTA (State Unemployment Tax Act)
• Mandatory unemployment insurance – each state is different
• Social Security Act outlines standards that each state’s
unemployment compensation law must follow
• Used to pay unemployment benefits
Covered in greater detail in Chapter 5
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Recordkeeping requirements
 Record keeping are required but there’s no specific form to
record data
 Fig. 1-2 on p. 1-5 specify the information required.
Fair Employment Laws
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Title VII of the Civil Rights Act of 1964
•
EEO (Equal Employment Opportunity)
Civil Rights Act prohibits discrimination in hiring,
firing, promoting or compensating based on color,
race, religion, national origin or gender
• Applies to all employers who engage in an industry
affecting commerce and employ 15 or more workers
in each of 20 or more weeks
• Civil Rights Act of 1991 – compensatory and punitive
damages in cases where discrimination is intentional
•
See http://www.eeoc.gov/ for more information
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Exemption from the Civil Rights Act
 US Government, however the act states that the president should
use his authority to implement the Civil Rights Act without
discrimination.
 Indian tribes, private membership clubs exempt from FIT, and
religious societies.
 Employers with less than 15 employees
 Dept. of Labor may authorize cease-and-desist orders to the
employers believed to violate the Civil Rights Act that are
enforceable in the courts.
Executive Orders
 Bans contractors of government contracts from
discriminating employment based on race, color, religion,
gender, or national origin even if the company are exempt
from the Civil Rights Act.
Age Discrimination in
Employment Act (ADEA)
• Age Discrimination in Employment Act states
employers cannot use age to discriminate in hiring,
firing or promoting
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Applies to employers with 20 or more employees
Provides protection to workers over 40 years old, with a
few key exceptions
• Places onus on employer to keep accurate personnel and
payroll records
• Exception: executives who are 65 or older in high decision
making position during two year period prior to retirement and
entitled to annual retirement benefit of $44,000.
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Americans with Disabilities Act
(ADA)
• Prevents employers with 15 or more employees
from discriminating against qualified* persons
based upon disability
• “Reasonable accommodation” must be provided this is a very vague term and subject to court
interpretation
*Qualified defined as person that can perform essential
functions of the job with or without reasonable
accommodation
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Federal Personal Responsibility &
Work Opportunity Reconciliation Act
• Requires employers to report information on all
new hires within 20 days to state agency
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Includes name, address and social security number
(submitting copy of W-4 suffices in many states)
Records are coordinated through Federal Office of Child
Support Enforcement (OCSE)
Fines up to $25/hire levied for failure to report
A few states now require same from independent
contractors
• Used to help enforce child support obligations
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Immigration Reform and
Control Act (IRCA)
• Law that bars hiring and retaining aliens unauthorized to work
in U.S.
• Accomplished by employee completing I-9 (Employment
Eligibility Verification) within three business days of
employment
• U.S. Citizenship & Immigration Services may audit and levy
penalties ($110 - $1,100 civil penalties/violation)
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Criminal penalties can apply if pattern of discriminatory practices
found
• E-Verify is a system that allows employers to check
employment eligibility of new hires by cross matching I-9
information with the Social Security Administration
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Family Medical Leave Act (FMLA)
• Covers companies with 50 or more employees within 75 mile
radius
• Employee guaranteed 12 weeks unpaid leave for
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Birth, adoption, critical care for child, spouse or parent
Leave may be used all at once or at separate times – within 12 months of
qualifying event
Employer must continue health-care coverage
Right to return to same job or comparable position
• FMLA expanded to include up to 12 weeks when family
member is on active duty or up to 26 weeks for line of duty
injury/illness
• Some states have paid family leave plans
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Family Medical Leave Act (FMLA)
Exception:
1. Highest paid 10 percent of the workforce
2. Employees with less than one year and 1,250 hours in the 12
months for the company
Uniformed Services
Employment & Reemployment
Rights Act
• Military personnel given right to take leaves of absences
from civilian jobs
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Right to return to prior jobs with seniority intact – must be
granted within 2 weeks of the job request
Health benefits must be started without a waiting period
Doesn’t apply if dishonorably discharged
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Employee Retirement Income
Security Act (ERISA)
• Trustees must monitor pension plans
• Vested 100% in 3 or 6 years (graduated)
Example
•
Years of
Service
Provides for Pension Benefit Guaranty Corporation
•
% Vested in
Pension Plan
2
20%
3
40%
4
60% etc….
A federal agency which guarantees benefits to employee
Stringent recordkeeping required
• Employee is eligible after reaching age 21 or completing one year
of service, whichever is later
• Employer must file Form 5500 annually
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Disclosure requirement
The pension plan must be filed with the US Dept. of Labor,
IRS, and the government insurance program.
 Eligibility requirement, provision for nonforfeitable
pension benefits, disqualifications, procedures for claims
 The annual reports include F/S and showing current
value of plan assets and liabilities, receipts and
disbursement, employer contributions; the assets held
for investment purposes; insurance data; and opinion by
an independent qualified CPA.
Current Legislation
• Health Care and Education Reconciliation Act (HCERA)
• Signed into law 3/30/10
• Most provisions effective 2014
• Beginning 2013 single filers with wages over $200,000 and joint
filers with wages over $250,000 must pay additional Medicare taxes
• Patient Protection & Affordable Care Act
• Signed into law 3/23/10
• Offers tax credit to small employers who offer health insurance to
employees
• If employer pays 50% or more of cost of premium, the credit is
35% (25% for tax exempt organizations)
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State Laws
• Workers’ Compensation Laws
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Most states require employers to pay employees’
premiums
Can self insure if state approved
• Different premiums based upon job class
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• State Disability Benefit Laws
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Five states plus Puerto Rico have established laws
requiring employers to provide disability benefits
This applies even if the disability did not arise due to
employment!
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Human Resource System
• In many mid- and large-sized companies, the human resources
(HR) system sets procedures/methods for recruiting, selecting,
orienting, training and terminating personnel
• FLSA requires stringent personnel recordkeeping – embodied in
the HR System
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Requisition for Personnel notifies HR of need for new employees
Application for Employment completed by person seeking employment
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No law prohibiting questions about religion, gender, race, age or national
origin - but must tie into ability to perform job (for example, bilingual
capabilities)
Aptitude testing only legal if related to job performance, lie
detector tests are illegal and drug testing is dependent upon
employer’s state of origin
• Preparing comprehensive job descriptions protects companies
from discrimination charges
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Human Resource System –
Personnel Records
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Reference Inquiry conducted before employment
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Due to amount of litigation in this area, respondents should only verify
facts and not offer subjective information
Really diminishes credibility of reference inquiries
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Prospective employer may require applicant to sign Employment Reference
Release
Must notify employee if seeking investigative consumer report
Hiring Notice alerts payroll department to new employee
Employee History Record contains performance evaluations,
compensation adjustments, disciplinary issues, performance
appraisals, etc.
Critical area – employment related litigation is
very expensive and often times avoidable
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Payroll Accounting System
• All procedures and methods related to disbursement of pay to
employees – documentation may include
• Payroll Register - compiles data per payroll period
• Employee Earnings Record - outlines earnings per period,
quarter-to-date and year-to-date for each employee
• Paycheck written or direct deposit made
• Outsourcing Payroll
• Many small- to mid-sized businesses hire a payroll company to
do their processing
• This is an independent company responsible for compliance
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Outsourcing Payroll
 The employer is ultimately responsible for the deposit and
payment of federal tax liabilities. The employer is liable for
all taxes, penalties and interest due if the 3rd party fails to
make the federal tax payment.
 Correspondence should be mailed to the employer’s address.
 Electronic Federal Tax Payment System (EFTPS)
 Employer needs to register on the EFTPS to get their own PIN
to periodically verify payments by 3rd Party.