Mastering Payroll
American Institute of
Professional Bookkeepers
© 2015 American Institute of Professional Bookkeepers
Mastering Payroll
Overview of Payroll Taxes
Amounts paid to workers may be subject to the
following withholdings and taxes:
 Federal income tax withheld (FITW)
 State income tax withheld (SITW) and local income
tax withheld
 Employment taxes (e.g., Social Security, Medicare)
 Unemployment insurance taxes
 State disability insurance (SDI)
Depending on how a worker is classified,
employers may be responsible for withholding and
depositing these taxes—and for paying employer
payroll taxes
Mastering Payroll
Overview of Payroll Taxes
Some payroll taxes are employee paid, such as:
FITW and SITW, which are withheld from wages
Employee FICA tax, which consists of:
 Social Security (OASDI) tax—6.2% of the
employee’s first $118,500 of wages paid in 2015
 Medicare (HI) tax, 1.45% of all the worker’s wages
—plus an additional 0.9% of wages over
$200,000
Other taxes are employer paid, such as:
Employer FICA—OASDI of 6.2%, HI of 1.45%
Federal unemployment insurance (FUTA), state
unemployment insurance (SUI) and SDI
Mastering Payroll
Types of Workers
 Common-law employees Passed the “common-law”
test so they are treated as
employees
 Statutory employees
Subject to FICA and FIT,
but no FIT is withheld
 Statutory nonemployees These workers are not
employees
 Independent contractors These workers are not
employees
 “Temps” from an agency Employees of the temp agency
—not the client firm
 Leased employees
Employees of leasing agency
—not the client firm
Mastering Payroll
Common-Law Employees
A worker is a common-law employee if the
employer controls:
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who performs the work
what work will be done
how the work will be done
when the work will be done
where the work will be done
When unsure about a worker’s classification,
file IRS Form SS-8 with the IRS. The IRS will
classify the worker based on how the employer
answers the questions on the SS-8
Mastering Payroll
Common-Law Employees
Common-law employees are workers for
whom you must:
withhold FIT (and SIT) and employee FICA on
wages and other payments
provide an annual W-2 showing taxable wages
paid and taxes withheld
pay employer FICA and other employment
taxes (e.g., FUTA, SUI, sometimes SDI)
periodically remit to the IRS and other
agencies both withheld employee taxes and
employer taxes
Mastering Payroll
Statutory Employees
Statutory employees are:
 drivers who are the employer’s agent or are
paid commissions
 full-time life insurance sales agents working
primarily for one insurance carrier
 certain home workers
 full-time traveling or in-city salespersons
Statutory employee wages: subject to FICA and
FUTA (but not FITW)—and possibly to SITW,
SUI and SDI, but this varies by state
Mastering Payroll
Statutory Nonemployees
Statutory nonemployees are:
 direct sellers (e.g., those who deliver and
distribute newspapers or shopping news or sell
consumer products in the home)
 licensed real estate agents
 companion sitters
Statutory nonemployee taxes: Exempt from
FUTA, FITW and FICA
Statutory nonemployees pay all their own FIT
and FICA taxes, and are not subject to FUTA
Who is responsible for paying SUI varies by state
Mastering Payroll
Independent Contractors (ICs)
Independent contractors (ICs) are workers who:
 control the methods and means of their work
 perform services that are not integral to the
trade or business of the company using them
 do not have FIT, SIT or FICA withheld, nor do
FUTA or SUI apply—but if an IC fails to provide
a taxpayer identification number (TIN) or SSN,
backup FIT and possibly SIT must be withheld
 have payments to them reported on Form
1099-MISC (not on a W-2) and are responsible
for all of their FIT and FICA taxes
Mastering Payroll
Temporary Help Agency
Referrals
Temps are workers who:
 are employed by a temp agency and work
at the client company on a temporary
basis
 do not have FIT or FICA withheld by the
client company (because they are the
agency’s employees)
 are the temp agency’s employees—if the
agency fails to pay employment taxes, the
client firm may be responsible for these
taxes
Mastering Payroll
Leased Employees
Leased employees:
 are employed by a leasing agency and work at
the client company, which can hire or
terminate them as it sees fit
 do not have FIT or FICA withheld by the client
company (because they are the agency’s
employees)
 are considered the leasing agency’s
employees —if the agency fails to pay
employment taxes, the client may be
responsible for them unless the leasing agency
is certified with the IRS
Mastering Payroll
Federal Wage-Hour Law
Employers covered by the Fair Labor Standards
Act of 1938 (FLSA) must pay a minimum hourly
wage and any overtime pay to employees
covered by FLSA. The FLSA defines those hours
of work for which employees must be paid.
 The “Enterprise Test” determines which
businesses are covered by, or exempt from FLSA.
Virtually all employers are covered.
 Exception: “Mom and Pop” shops are not subject
to the enterprise test. If they hire only the owners’
children, these employers are exempt from FLSA.
Mastering Payroll
Which Firms Are Covered by
FLSA?
Employers covered by FLSA include:
 Businesses started on or after March 31, 1990
that have gross annual sales of at least $500,000
 Dry cleaners and construction companies that
started before April 1, 1990
 Retailers started before April 1, 1990 that have
annual gross sales of at least $362,500
 Nonretail businesses started before April 1, 1990,
that have gross annual sales of at least $250,000
 Schools, hospitals and nursing homes
 Business engaged in interstate commerce
Mastering Payroll
The Federal Minimum Wage
The federal minimum wage changes periodically
 As of July 24, 2009, the minimum wage is
$7.25/hour
 Tipped employees have a lower federal minimum
wage —but their total earnings must average at
least the minimum wage
 The formula: $2.13/hour tipped employee minimum
wage + tips = federal minimum wage, or the employer
must make up the difference
 Under federal law an employee may not be docked
an amount that reduces the employee’s wages for
the workweek below the federal minimum wage
Mastering Payroll
Tipped Employee Wages
Example: Darla, a waitress, earns $2.13 an hour plus tips. In March
2015, Darla works 35 hours one week and earns $280:
$74.55 wages ($2.13 × 35) + $205.45 in tips
Darla’s hourly pay:
$280/35 = $8.00
$8 is more than the federal minimum wage
of $7.25, so no additional pay is required.
Darla’s employer can pay her $74.55 ($2.13
× 35 hours) for the week.
Mastering Payroll
Tipped Employee Wages:
Example
Example: One week in May 2015, Darla works 40 hours and earns $240:
$85.20 wages ($2.13 × 40) + $154.80 tips = $240
The required federal minimum wage is $7.25:
40 hours x $7.25 = $290 minimum pay for the week
Darla’s
employer must make up the $50
difference:
$290 minimum pay for the week – $240
received
= $50 still owed to Darla by her employer
Mastering Payroll
Federal Minimum Wage
Exemptions
In addition to tipped employees, others
exempt from the minimum wage include:
 Outside salespersons
 Employees under age 20 paid at least
$4.25/hr. (applies only to the first 90 days of
employment) —provided that they do not
displace or reduce the work hours of
employees paid regular wages
 Employees exempt by special certificate
 Children employed by their parents in a
mom and pop shop
Mastering Payroll
State Laws
Wage-hour rules covered by state law include:
 Frequency of wage payments
 When a terminating employee must be paid
 Method of payment (cash, check, debit card,
EFT, etc.)
 Rules for unclaimed wages: escheat law
requires employers to remit unclaimed wages
to the state after a specified time period
When federal v. state laws conflict, generally the
one most favorable to the employee applies
Mastering Payroll
Federal v. State Law
Example: Jose works in a state with no minimum wage.
For the first week in February 2015, he works 40 hours.
What is the minimum he must be paid for the week?
$290 ($7.25 × 40 hours)
Federal minimum
wage
Mastering Payroll
Federal v. State Law
Example: Dan works in a state which has a minimum wage of
$8.00 an hour. For one week in January 2015, Dan works 40
hours. What is the minimum he must be paid for the week?
$320 ($8.00 × 40 hours)
The greater of $7.25 or $8 an
hour
Mastering Payroll
Federal v. State Law
Example: Ming works in a state whose minimum wage is
$5.15. For one week in March 2015, Ming works 30 hours.
What is the minimum she must be paid for the week?
$217.50 ($7.25 × 30 hours)
The greater of $7.25 v. $5.15 an
hour
Federal minimum wage as of July 24,
2009
Mastering Payroll
What Activities Count as
“Work”?
Federal law specifies the following as
activities for which employees must be
paid:
 Time spent putting on or taking off
clothing required by the employer
 Time required to be on call either near
the workplace or on the premises
 Travel time during the employee’s
normally scheduled work hours
Mastering Payroll
Travel Time
Employees must be paid for hours of travel:
 from one worksite to another during normal working
hours
 to a worksite that is a significant distance from the
employee’s normal worksite
Employees need not be paid for time commuting
to and from work—unless:
 the employee is on 24-hour call and takes a company
vehicle home to be able to respond to emergency calls
 after finishing a normal shift, is called back to work at a
job site other than the employee’s normal job site
Mastering Payroll
Travel Time
Employees must be paid travel time for
overnight trips—but only for those hours of
travel that are during the employee’s normal
working hours
The day of the week is irrelevant—what
matters is whether the hours of travel coincide
with the employee’s regularly scheduled hours
Example: Tyree normally works 9-5, M-F. If he
travels on Monday from 6-8 p.m., he need not be
paid for the travel time—but if he travels on any day
from 1-3 p.m. he is due 2 hours’ pay.
Mastering Payroll
Travel Time
Example: Jan normally works 8 a.m. – 5 p.m., M - F. To attend a seminar, she
leaves home for the airport Monday at 12 p.m. and arrives at her hotel in
another city at 8 p.m. How many travel hours must Jan be paid for?
Jan’s normal work hours are 8 a.m. – 5 p.m. She must be paid for travel time
during these hours, which was 12 – 5 p.m.
She does not have to be paid for her travel time between 5 p.m. and 8 p.m.
Mastering Payroll
Travel Time
Example: Chen normally works 7 a.m. - 4 p.m., M-F. He leaves home on a business trip Sunday
at 5 a.m. arriving at the hotel at 11 a.m. The following Saturday, he leaves the hotel at 1 p.m.
arriving home at 6 p.m. How many travel hours must Chen be paid for Sunday? for Saturday?
Sunday paid travel hours: 7 - 11 a.m. = 4 hours during Chen’s normal work hours, 7 a.m. - 4
p.m.
Saturday paid travel: 1 p.m. - 4 p.m. = 3 hours during Chen’s normal work hours, 7 a.m. - 4
p.m.
Mastering Payroll
Premium Pay for Overtime (OT)
FLSA requires at least 1½ times employees’
regular hourly pay rate for each hour actually
worked over 40 hours for the workweek
 A workweek is defined as 7 consecutive days or 168
consecutive hours—but need not be Monday - Sunday
as long as the employer uses the same 7 days
consistently
 Excludable: Vacation, holiday or sick pay are not
hours actually worked. Paid commuting time to and
from work are not hours actually worked.
 Prohibited: Applying one workweek’s overtime hours
to another workweek to avoid paying OT. Exception:
Health care and public sector employees.
Mastering Payroll
Premium Pay for Overtime (OT)
How is a salaried employee’s regular hourly
rate of pay calculated?
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Annual pay ÷ regular hours worked per year
Monthly pay ÷ regular hours worked per month
Weekly pay ÷ regular hours worked per week
Biweekly pay ÷ regular hours worked per
biweekly period
Mastering Payroll
Premium Pay for Overtime (OT)
Example: Serge’s son is getting married, so he arranges to work at the factory 48 hours this week
and take off one day next week. His regular hourly pay rate is $24. How much must he be paid for
this week? for next week?
Serge’s OT pay rate: $24 × 1.5 = $36
Week 1: (40 hrs × $24) + (8 hrs × $36) = $1,248 Serge must be paid 8 hours of OT for this week
Week 2: 32 hrs × $24 = $768
Serge’s employer may not apply the extra 8 hours in Week 1 to Week 2 to avoid OT pay in Week 1
Mastering Payroll
Premium Pay for Overtime (OT)
Example: Marina’s workweek is Monday - Friday. She is out sick Monday and Tuesday,
but is given 16 hours sick pay for the time. To make up for this time, Marina works 36
hours, Wednesday-Friday. If Marina’s hourly pay rate is $20, how much must she be paid
this week?
$20 × 52 hrs (16 sick pay + 36 worked) = $1,040
The 16 hours sick pay are not hours actually worked, so they need not be included to
determine if Marina is entitled to OT pay.
Mastering Payroll
Premium Pay for Overtime (OT)
Example: Jo is paid $500 for a 40-hour workweek. This week, Jo works 50 hours. What is Jo’s
OT pay rate? What is her total pay for the week?
$500 × 52 weeks = $26,000 per year
$26,000 ÷ 2,080 hrs (40 hrs × 52 wks) = $12.50/hr
$12.50 × 1.5 premium rate = $18.75 OT hourly rate
$500 (40 hr week) + $187.50 OT pay (10 hrs × $18.75) = $687.50 Jo’s pay for the week
Mastering Payroll
Premium Pay for Overtime (OT)
Example: James is paid $1,200 for a 32-hour workweek. This week, James works 42 hours. What is
James’s OT pay rate? What is his total pay for the week?
$1,200 × 52 weeks = $62,400 per year
$62,400 ÷ 1,664 hrs (32 hrs × 52 wks) = $37.50/hr
$37.50 × 1.5 premium rate = $56.25 OT hourly rate
$1,200 (32 hrs × $37.50) + $300 (8 hrs x $37.50)
+ $112.50 (2 hrs × $56.25) = $1,612.50 total pay
Mastering Payroll
Premium Pay for Overtime (OT)
The following employees are exempt from OT
(unless more employee-favorable state laws apply):
 Executives paid at least $455 a week
 Administrative personnel paid at least $455 a week
 Persons actively responsible for establishing and enforcing
company policy and general business operations
 Professionals who do advanced work in science or
learning and earn at least $455 a week. Includes
computer systems professionals earning at least $27.63
an hour.
 Outside salespersons—persons regularly and normally
working away from the employer’s place of business to
make sales calls
Mastering Payroll
Hiring Employees
Employers must obtain from new hires:
 A Social Security number (SSN)
 Those without an SSN must obtain one by completing
Form SS-5, Application for New Social Security Card
 Form W-4, Employee Withholding Allowance Certificate
 Provides data that employers use to determine how
much FIT to withhold
 SIT withholding allowance certificate (if required)
 Age certificate (from those within 2 years of the legal
age they are allowed to work)
 State tax exemption certificate—e.g., when your state
has reciprocal agreements with neighboring states
Mastering Payroll
Form I-9
An I-9 is completed as follows:
 Section 1. Completed by the employee
 Employee provides name, address, DOB,
SSN, and signs an oath that he or she is
legally able to work in the U.S.
 Section 2. Reviewed and signed by employer
after viewing and recording documents that
substantiate the employee’s identity and
authorization to work in the U.S.
 To verify, examine just one document from
List A —or one each from Lists B and C
Mastering Payroll
Form I-9
List A. Acceptable documents include:
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U.S. passport (expired or unexpired)
Certain unexpired foreign passports
Permanent resident card
Alien registration receipt card
Employers need examine only one
document from this list to verify
both the employee’s identity and
eligibility to work in the U.S.
Mastering Payroll
Form I-9
If a document from List A is not
presented, employers must use one
document each from Lists B and C
List B. Acceptable documents include:
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Driver’s license with photo
School ID card with photograph
Voter registration card with photo
U.S. military card or draft record
List C. Acceptable documents include:
 U.S. Social Security Card
 Birth certificate
 U.S. citizen identification card
Mastering Payroll
Form W-4
All employees must complete Form W-4,
Federal Withholding Allowance Certificate. The
W-4 provides an employer with the data
needed to withhold FIT from that employee’s
pay
 Prohibited: Employers cannot withhold a flat
dollar amount or flat percentage of pay
 Permitted: Employees can ask to have an
additional flat dollar amount of FIT withheld
Until a W-4 is submitted, an employer must withhold
FIT as if the employee is single with zero allowances
Mastering Payroll
Form W-4
Employers should not accept a W-4 that:
 is incomplete
 is altered by additions or deletions
 contains information that the employer
knows to be false
Employers should refrain from giving tax
advice on employee withholding. Explain
what data is needed but do not make
suggestions—e.g., how many exemptions
to take. Refer employees to IRS Publication
505 on the IRS website.
Mastering Payroll
Form W-4
If an employee wants to change the number
of withholding allowances, require a new W4
 Employers must implement a W-4 by the
start of the first payroll period ending on
or after the 30th day from the date that a
W-4 is submitted
Employers are not required to submit W-4
copies to the IRS unless the IRS asks for one
Mastering Payroll
Form W-4
An employee may claim exempt from
withholding —write “exempt” on Line 7—only
if that employee:
 had no tax liability the previous year, and
 expects to have no tax liability in the
current year
An employee who claims exempt must file a
new W-4 each year by February 15 (if this is a
weekend or federal legal holiday, by the next
business day)
Mastering Payroll
FICA Taxes
FICA tax consists of Social Security and Medicare
taxes. The 2015 rates are:
 Social Security tax—6.2% is withheld from the first
$118,500 of an employee’s wages to a maximum
$7,347.00
 Medicare tax—1.45% is withheld on all wages (no limit)
 plus .9% of wages above $200,000
The employer matches some FICA taxes:
Social Security tax—the employer pays 6.2% of the first
$118,500 of the employee’s wages to a maximum $7,347.00
Medicare tax—the employer pays 1.45% of wages (no limit)
but not the additional .9% of wages above $200,000
Mastering Payroll
FICA Taxes
Examples of employees exempt from FICA tax:
 Children, foster children and stepchildren under
age 18 employed by sole proprietorships 100%
owned by their parents
 Children, foster children and stepchildren under
age 18 employed by a partnership 100% owned
by the parents
 Children under age 21 doing domestic work in
their parents’ home
 Parents employed by their children for domestic
work
Mastering Payroll
Federal Income Tax Withheld
(FITW)
Factors used to determine FITW:
 Employer pay period (weekly, biweekly, etc.)
 Employee marital status on the W-4
 Employee personal allowances on the W-4
 Employee federal taxable wages for the period
 Supplemental wages (e.g., bonuses)
Find the correct amount of FITW for a paycheck
using IRS withholding tables in IRS Publication
15, Circular E, Employer’s Tax Guide.
Mastering Payroll
Form 941 Tax Deposits
FITW + FICA are known as “941 taxes”
because they are reported on Form 941,
Employer’s Quarterly Federal Tax Return.
The 941 shows the employer’s accumulated
FITW + FICA withheld + employer FICA for the
quarter
When a pay period spans two quarters,
report the liabilities for each quarter separately
941 taxes not yet paid are “941 liabilities”
Mastering Payroll
Form 941 Tax Deposits
When to pay Form 941 taxes:
941 liability under $2,500 for the quarter:
Remit FITW and FICA taxes with that quarter’s
941
 941 liability under $1,000 for the year: The
employer may have the option of filing and
paying FITW and FICA annually
Mastering Payroll
Form 941 Tax Deposits
941 liabilities must be deposited
electronically using the IRS’s Electronic
Federal Tax Payment System (EFTPS)
Exception: An employer with 941 liabilities
under $2,500 may pay the tax owed by
check, credit or debit card, or electronic
funds withdrawal (EFW)
Mastering Payroll
The Lookback Period for 941
Taxes
The lookback period is the 12-month period
ending on June 30 of the prior year
 Example: The lookback period for depositing 941
taxes in 2015 is July 1, 2013–June 30, 2014
At the end of each calendar year, a monthly
depositor uses the lookback period to determine
its deposit status for next year
Employers with up to $50,000 in accumulated 941
taxes for the lookback period are monthly depositors
 Employers with over $50,000 in accumulated 941
taxes for the lookback period become semiweekly
depositors
Mastering Payroll
Form 941 Tax Deposits
Due dates for depositing 941 liabilities
 A new employer is a monthly depositor
through the end of the first calendar year—
with few exceptions
 An employer automatically becomes a
semiweekly depositor if it reaches a liability
of:
 over $100,000 at any time during the
calendar year, or
 $50,000 for the lookback period
Mastering Payroll
How Monthly Depositors Remit
Taxes
Monthly depositors must remit 941
taxes:
by the 15th of the month following the
month in which the liability is incurred
by the next business day if the 15th falls
on a weekend or federal legal holiday
Mastering Payroll
IRS Monthly Deposit Schedule
Month
Deposit Due Date
January
February 15
February
March 15
March
April 15
April
May 15
May
June 15
June
July 15
July
August 15
August
September 15
September
October 15
October
November 15
November
December 15
December
January 15
Mastering Payroll
Monthly Depositors: Example
Example: Diaz Corporation is a monthly
depositor. For March, Diaz’s’ s accumulated
FITW and FICA tax liability is $3,500. When
must Diaz remit its 941 taxes to the IRS?
Mastering Payroll
IRS Monthly Deposit Schedule
Month
Deposit Due Date
January
February 15
February
March 15
March
April 15
April
May 15
May
June 15
June
July 15
July
August 15
August
September 15
September
October 15
October
November 15
November
December 15
December
January 15
Mastering Payroll
Monthly Depositors: Example
Example: Diaz Corporation is a monthly
depositor. For March, Diaz’s’ s accumulated
FITW and FICA tax liability is $3,500. When
must Diaz remit its 941 taxes to the IRS?
Diaz must remit this 941 tax liability to the
IRS:
By April 15, using EFTPS
If April 15 is on a weekend or federal legal
holiday, Diaz has until the next business
day to make the deposit
Mastering Payroll
How Semiweekly Depositors Remit
Taxes
Employers with accumulated 941 tax
liabilities over $50,000 for the lookback
period remit payment using the
Wednesday/Friday rule
The due date is extended one business day if
a federal legal holiday falls on any day
between payday and the
Wednesday/Friday deposit date
Mastering Payroll
The Wednesday/Friday Rule
Payday falls on
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Deposit due date
The next Friday
The next Friday
The next
Wednesday
The next
Wednesday
The next
Wednesday
The next Friday
Mastering Payroll
Semiweekly Depositors
Example: Watson Co., a semiweekly
depositor, pays its employees on the 15th
and last day of the month. May 15 is a
Tuesday. When must Watson remit its 941
taxes to the IRS?
Mastering Payroll
Semiweekly Depositors
Payday Falls on:
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Deposit Due
Date
That Friday
That Friday
Next Wednesday
Next Wednesday
Next Wednesday
Next Friday
Next Friday
Mastering Payroll
Semiweekly Depositors:
Example
Example: Watson Co., a semiweekly
depositor, pays its employees on the 15th
and last day of the month. May 15, is a
Tuesday. Watson must remit its 941 taxes to
the IRS:
that Friday, May 18
If the taxes were due on a federal legal
holiday that fell on any day from May 16–18,
the taxes would be due on the next business
day, Monday, May 21
Mastering Payroll
Semiweekly Depositors:
Example
Example: Watson Co.’s payday falls on May
31, a Thursday. When must Watson remit its
941 taxes to the IRS?
Mastering Payroll
Semiweekly Depositors
Payday Falls on:
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Deposit Due
Date
The next Friday
The next Friday
The next
Wednesday
The next
Wednesday
The next
Wednesday
The next Friday
Mastering Payroll
Semiweekly Depositors
Example: Watson Co.’s payday falls on May
31, a Thursday. When must Watson remit its
941 taxes to the IRS?
Because May 31 is a Thursday, Watson
must remits it 941 taxes by the following
Wednesday, June 6
If any day from June 1–6 is a federal legal
holiday, Watson has until the next business
day, Thursday, June 7 to make the deposit
Mastering Payroll
Form 941 Deposit Shortfalls
Monthly depositors remit a shortfall with their
next 941
Semiweekly depositors remit a shortfall by the
earlier of:
 the Wednesday or Friday that falls after the 15 th
of the month following the month of the shortfall
 the 941 due date
There are no penalties or interest if the shortfall
does not exceed the greater of $100 or 2% of the
liability, and the shortfall is deposited in a timely
manner
Mastering Payroll
Shortfalls: Monthly Depositors
On May 5, monthly depositor FreeCo
discovers that its June 941 taxes deposited
July 15 were short $95.
FreeCo can avoid penalties and interest by
paying the $95 by July 31, the due date of
its second quarter 941.
Caution: The IRS discourages casual use of the
shortfall procedure—it is designed for unusual
cases where estimates are required and for the
occasional error.
Mastering Payroll
Shortfalls: Semiweekly
Depositors
Semiweekly depositor, Redeye, Inc.
discovers its 941 deposit for the period
ending Friday, May 22, was short by $178—
1.75% of its 941 liability for the period.
Because the shortfall is less than 2% of
Redeye’s 941 liabilities for the period, it can
avoid penalties by depositing $178 by the
first Wednesday or Friday after June 15 (the
15th of the month following the month of the
shortfall).
Mastering Payroll
The One-Business-Day Deposit
Rule
An employer that incurs a 941 liability of
$100,000 at any time must remit its 941
taxes within one business day of reaching
$100,000
 Once the one-business-day deposit rule is
triggered, that employer:
 becomes a semiweekly depositor for the
remainder of the year and
 remains a semiweekly depositor in the
following calendar year
Mastering Payroll
Form 941 Recap
To review:
 Form 941, Employer’s Quarterly Federal Tax
Return, reconciles wages paid and
employment taxes withheld/owed with the
amount of tax deposited for the quarter
 Each quarter’s 941 is filed at the end of the
month following the end of the quarter. For
example, the first quarter ends March 31, so
the first-quarter 941 is filed April 30
 If deposits are timely made and for the full
amount, due date is extended 10 business
days
Mastering Payroll
Quarterly Employment Tax
Periods
Quarter Ending:
March 31
June 30
September 30
December 31
Filing and
Deposit Due Date
April 30
July 31
October 31
January 31
Mastering Payroll
FUTA Tax and Form 940
FUTA (Federal Unemployment Tax Act) tax is
paid by the employer—not employees—to
fund state unemployment benefit programs
 Generally, an employer pays FUTA tax if it:
 pays wages of at least $1,500 in a calendar
quarter or
 employs at least one person for some part
of any day in 20 weeks during the current
or previous year
 All states impose a similar SUI tax on
wages
Mastering Payroll
FUTA Tax and Form 940
The FUTA tax rate for 2015 is 6.0% of the first
$7,000 of each employee’s taxable wages
 Employers are generally entitled to a
maximum FUTA credit of 5.4%, reducing their
net FUTA rate to 0.6%
 Some states took loans from the federal
government to pay UI benefits. Employers in
states that have not repaid their loan may not
get the maximum 5.4% FUTA credit and will
pay more than 0.6% of FUTA wages (generally
referred to as a FUTA credit reduction).
Mastering Payroll
FUTA Tax and Form 940
Form 940 and FUTA tax due dates
 Employers that deposited all FUTA taxes on time and in
full during the year have until Feb. 10 of the following
year to file Form 940
 Employers paying FUTA tax higher than 0.6% (due to
unpaid state loans) must remit the additional tax by
the following Jan. 31
If the FUTA tax liability for a quarter is:
 over $500—tax must be deposited before the end of
the month following the end of the quarter, even
though the 940 is not due then
 $500 or less, the liability can be rolled over to
subsequent quarters until it exceeds $500, but is due
the following Jan. 31
Mastering Payroll
Form 940: Electronic v. Paper
Filing
FUTA tax must be paid electronically via
EFTPS
Exception: An annual FUTA liability of up to
$500 may be paid by check, debit/credit card
or EFW when filing the 940
Mastering Payroll
Form 945
Form 945, Annual Return of Withheld Federal
Income Tax, is used to report FITW on
nonpayroll payments, including:
 Backup withholding on certain payments, such
as payments to independent contractors who
failed to provide an SSN or TIN.
 Gambling winnings
 Pensions, annuities and possibly interest and
dividends
 Military retirement
Mastering Payroll
Form 945
Form 945 reconciles FIT withheld from
nonpayroll payments, such as pensions and
other government payments
945 taxes normally are paid via EFTPS
However, liabilities of less than $2,500 can be
paid by check, debit/credit card or EFW when
Form 945 is filed
Form 945 is an annual return, and
accordingly, the lookback period is the
second previous calendar year. For example,
the lookback period for 2015 would be 945
taxes paid in 2013.
Mastering Payroll
Form 945
DryCo’s 945 liability for 2013 is $40,000. When
must DryCo deposit its 945 tax liability for April
2015?
Because DryCo’s total 945 taxes for 2013 did
not exceed $50,000, it is a monthly depositor
for 2015 and will deposit its 945 taxes by May
15, 2015 (or the next business day).
DryCo uses its 945 tax liability from 2013 (its
second prior calendar year) to determine its 945
depositor status for 2015. When setting the 945
deposit schedule, 941 taxes are not considered.
Mastering Payroll
Form W-2
Form W-2, Wage and Tax Statement, is a
summary of each employee’s taxable
wages and taxes withheld for the year
 Employers give copies B, C and 2 of the
W-2 to employees, send Copy A to the
SSA and keep Copy D for their records
 Employees attach copies of their W-2 to
their federal and state income tax returns
 Some states and locals require that
employers file copies of W-2
Mastering Payroll
Form W-2
The W-2 must be provided to:
Employees by Jan. 31 (or next business day)
 Terminated employees by the earlier of Jan. 31
or within 30 days of their request
The SSA by:
the last day of February (or next business day)
if filed electronically, by Mar. 31 (or next business
day)
States and local areas:
dates vary by locale
Mastering Payroll
Form W-3
Employers filing up to 249 Forms W-2 for the
year file Copy A with Form W-3, Transmittal
of Wage and Tax Statements, which is a
summary of the data on the attached W-2s
Employers filing 250 or more W-2s for the
year must file electronically with the SSA —
but are not required to file a W-3
Mastering Payroll
How Long Must Records Be
Retained?
FLSA requires keeping the records listed below
for 3 years:
 Payroll register
 Timecards
 Time sheets (reports of hours worked)
 Payroll tax records
 Tax deposit receipts
 W-4s
 Personnel files
 Cancelled and voided checks
Work schedules must be kept for 2 years
Mastering Payroll
How Long Must Records Be
Retained?
The IRS requires keeping the following for 4
years from April 15 of the year following the
year that the document applies to:
 Payroll register and payroll tax records
 Tax deposit receipts
 Personnel files
 Cancelled/voided checks
 Forms 941, 940, 945 and supporting
documents
Mastering Payroll
How Long Must Records Be
Retained?
The IRS requires keeping the following for 4
years:
 A returned W-2 from the date it was due
 A W-4 from the later of:
 the date the company received it, or
 when last used to calculate FITW
Mastering Payroll
When Wages Become Taxable
Wages are taxable in the year that employees
have constructive receipt of the pay—that is,
when the pay is available to them:
Example: December 2014 paychecks
distributed to employees after Christmas but
not picked up by some employees until 2015
are taxable to these employees in 2014.
Example: Wages earned in late December
2014 but not paid to employees until 2015 are
taxable to employees in 2015.
Mastering Payroll
When Wages Become Taxable
Wages are taxable in the year employees have
constructive receipt of their pay
 Unless the employer has a formal deferred
compensation plan, it cannot postpone paying
wages to benefit itself or an employee
 Advances and overpayments are taxable in the
year that they are constructively received
 If repaid the same year, deduct from taxable wages
 If repaid in a subsequent year, consult a CPA or tax
attorney (rules are complex)
Mastering Payroll
SUI Tax Returns and Deposits
Report SUI, the state version of FUTA, as follows:
 File SUI returns quarterly
 Taxes generally are due the last day of the month
following the end of the quarter
 Wage detail reports are generally filed quarterly
 SUI rates vary both by employer payments in
previous years for UI premiums and for UI
benefits
 Some states also require employers, employees
or both to pay state disability insurance (SDI)
Mastering Payroll
Reporting SITW
Generally, employers must file a copy of
employee W-2s with the state
 In most states, the deadline is the last day
of February—if filed electronically, March 31
 Some—but not all—states require filing a
state W-2 or copy of the federal W-2 and
may or may not have their own W-3 (check
state law)
 For states with no SIT, no W-2s are filed with
the state
Mastering Payroll
Form 1099
Form 1099 is filed to report payments to
independent contractors or investors
 1099-MISC: reports nonemployee
compensation totaling at least $600 for the
year in commissions, fees, royalties, rent and
other payments—used primarily for
independent contractors
 1099-INT: reports interest paid
 1099-DIV: reports dividends paid
 1099-R: reports payments to retirees (for
annuities, pensions, etc.)
Mastering Payroll
Form 1099
Form 1099 is due to:
 Recipients. Must receive their 1099s by Jan. 31
 The IRS. Must be filed by the last day of
February for paper forms—by March 31,
electronically
 File each kind of paper 1099s, a separate Form
1096, Annual Summary and Transmittal of U.S.
Information Returns (electronic 1099s do not
require a 1096)
Examples: With all paper Forms 1099-MISC, file a 1096;
with all paper Forms 1099-INT, a separate 1096, etc.
Mastering Payroll
The Payroll Register
A payroll register includes for each payment:
Check number
Employee’s name and SSN
Gross wages or salary (regular pay, OT, bonus)
Federal taxes withheld
FICA taxes withheld
State and local income taxes withheld
Other deductions (health, dental or life
insurance, union dues, uniforms, etc.)
 Net payment to employee or employee’s
financial account(s)







Mastering Payroll
Payroll Journal Entries
Each payday, you record two journal entries:
First journal entry: Employee salaries and
deductions ( “payroll distribution”)
Second journal entry: Employer payroll tax
expenses, such as FUTA and employer FICA
Mastering Payroll
Payroll Journal Entries
First journal entry: Employee salaries and
deductions ( “payroll distribution”)
Salary Expense
xxx
FICA Employee
FITW Payable
Health Ins.  employee contrib.
Union Dues  employee contrib.
Cash
xxx
xxx
xxx
xxx
xxx
Mastering Payroll
Payroll Journal Entries
Example: In the pay period ending May 9,
2015, XyCo’s gross wages are $25,000. XyCo
withholds from employee pay $1,912.50 FICA,
$4,500 FITW and $400 SITW
First journal entry: XyCo’s salaries and
deductions for the May 9th pay period:
Salary Expense
1,912.50
4,500.00
25,000.00
FICA Employee
FITW Payable
SITW Payable
Mastering Payroll
Payroll Journal Entries
Second journal entry: Employer payroll taxes
Each pay period, employers incur not only
salary expense, but employer payroll
expenses, such as the employer’s share of
FICA, as well as FUTA and SUI taxes
Payroll Tax Expense
xxx
FICA Employer
xxx
FUTA Payable
xxx
SUI Payable
Mastering Payroll
Payroll Journal Entries
Example: In the pay period ending May 9,
2015, XyCo’s incurs payroll expenses of
$1,912.50 employer FICA, $200 FUTA and
$295 SUI.
Second journal entry: XyCo’s employer
payroll tax expenses for the May 9th pay
period:
Payroll Tax Expense
2,407.50
FICA Employer
1,912.50
FUTA Payable
200.00
SUI Payable
Mastering Payroll
Payroll Journal Entries
Another journal entry is recorded when all
withheld and employer taxes are remitted to
federal and state agencies and vendors, such
as insurance companies
FICA Employee
FICA Employer
FITW Payable
Employee Health Ins.
Employer Health Ins.
xxx
xxx
xxx
xxx
xxx
xxx
Cash
Mastering Payroll
Payroll Journal Entries
When the end of a period falls in the middle of
a week—e.g., December 31, 2015 falls on a
Thursday, accrual basis companies must
accrue their payroll expense. This is explained
in detail in Mastering Adjusting Entries.
Example: CompCo pays employees every Friday.
But the last payday of 2015 is Friday, January 1,
2016, and the company is closed, so it pays
employees on Monday, January 4, 2016. CompCo
must accrue 4 days’ payroll expense (MondayThursday) for 2015, even though it will pay
employees in 2016.
Mastering Payroll