Chapter 7
Calculating Pay and Payroll
Taxes: The Beginning of the
Payroll Process
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
Learning Objective 1
Calculating gross pay, employee payroll tax
deductions for federal income tax
withholding, state income tax withholding,
FICA – OASDI/Medicare, and net pay
LO-1
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The Payroll Process
1.
Calculate gross earnings, employee
withholding taxes, net pay
◦
◦
◦
Prepare paychecks
Prepare payroll register
Update employee earnings records
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The Payroll Process
2.Calculate and pay employer payroll

Report payroll and payroll taxes
◦ Forms W-2 and W-3
◦ Form 941 quarterly
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The Payroll Process
3.
4.
5.
Record payroll, payroll taxes, and
payment of payroll and payroll taxes in
general journal
Post to accounts in general ledger
Report payroll and payroll taxes:
Prepare financial statements
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Gross Earnings

Employees
◦ Hourly – paid only for hours worked
◦ Salaried – paid fixed dollar amount

Pay Period
◦ Daily, weekly, biweekly, semimonthly, monthly,
quarterly, annually
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Gross Earnings

Regular earnings + Overtime earnings

Fair Labor Standards Act - Hourly
employee paid time and a half for any
hours worked over 40 in one workweek
◦ Employers must follow if doing business in
more than one state
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Publishing, College Accounting: A
Practical Approach, 11e by Slater
Exercise 7-1A
Dawn Slow:
39 hours x $10 regular rate
$390
Jill West:
40 hours x $12 regular rate
10 overtime hrs x $18 overtime rate
$480
180
$660
LO-1
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Publishing, College Accounting: A
Practical Approach, 11e by Slater
Exercise 7-2B
Tom Suarez
37 hours x $14 regular rate
Jim Martin
40 hours x $12 regular rate
8 overtime hrs x $18 overtime rate
$518
$480
144
$624
LO-1
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Federal Income Tax Withholding

W-4 Form – Employee’s Withholding Allowance
Certificate
◦ Marital status
◦ Total number of allowances

Amount withheld based on
◦ Employee’s gross earnings for the pay period
◦ Marital status and allowances
◦ Tables in IRS publication 15
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State Income Tax Withholding

Each state has its own laws. This text
assumes a fixed percentage of employee
earnings.
◦ 43 states charge a state tax
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Other Income Tax Withholding
Cities
 Counties
 Townships

◦ Have different rates
◦ Employers often don’t withhold
◦ Taxpayers must pay on their own
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Employee Withholding – Social
Security Taxes
FICA – Federal Insurance Contribution
Act
 Provides

◦
◦
◦
◦
Retirement for persons over 62 years old
Medical benefits for persons over 65
Benefits for disabled persons
Benefits for families of deceased workers who
were covered by this law
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Employee Withholding – Social
Security Taxes

Two taxes
◦ Old-Age, Survivor’s, and Disability Insurance
(OASDI)
◦ Medicare (HI) - Hospital Insurance
LO-1
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OASDI
Limit on amount of tax employee must
pay
 Maximum dollar amount of earnings that
can be taxed – wage base
 Rate for 2008 – 6.2% of wage base of
$102,000

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Medicare
All wages subject to tax
 Rate = 1.45%
 Covers certain medical expenses after an
individual turns 65

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Other Withholdings
Medical insurance
 Savings plan
 Disability insurance
 Union dues

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Net Pay
Gross earnings
-Federal income tax
-State income tax
-OASDI tax
-Medicare tax
-Other withholdings
Net Pay
LO-1
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
Exercise 7-2
Alvin Pang:
Gross pay
Federal income tax
OASDI
Medicare
Total deductions
Net pay
$1,690.00
$237.00
104.78
24.51
366.29
$1,323.71
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© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
Exercise 7-2
Angelina Potts:
Gross pay
Federal income tax
OASDI
Medicare
Total deductions
Net pay
$1,600.00
$249.00
99.20
23.20
371.40
$1,228.60
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© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
Exercise 7-8
Office:
$30,000 / $100 = 300
300 x $.21 =
Repairs: $84,000 / $100 = 840
840 x $1.70 =
Total
$63
1,428
$1,491
LO-1
© 2010 Prentice Hall Business
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Learning Objective 2
Calculating employer taxes for FICAOASDI/Medicare, FUTA, SUTA, and
workers’ compensation insurance
LO-2
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Employer Payroll Taxes
Social Security taxes – matches employee
contribution; both employer and
employee pay 6.2% of employee gross
wages
 Unemployment taxes – provide
unemployed workers with benefits

LO-2
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FUTA and SUTA

FUTA taxes
◦ Federal Unemployment Tax Act
◦ Pay administration costs, not the benefits

SUTA taxes
◦ State Unemployment Tax Act
◦ Pay the benefits
LO-2
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FUTA and SUTA

FUTA taxes
◦ 6.2% on wages earned by each employee up
to wage base limit of $7,000
◦ Allowable tax credit for SUTA tax up to a
maximum of 5.4%
◦ Net FUTA tax rate = .8%

SUTA taxes
◦ Each state determines wage base limit
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Workers’ Compensation
Insurance
Insures employees against losses due to
accidental injury or death while on the
job
 In most states, paid by employer
 Gross payroll is estimated and rate is
calculated for each $100 of weekly payroll

LO-2
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
Exercise 7-3
Employee Cumulative Gross Pay
Earnings (subject to
Medicare)
Earnings
Subject to
OASDI
Earnings
Subject to
FUTA/SUTA
J. Kline
$3,500
$900
$900
$900
A. Met
6,600
750
750
400
D. Ring
7,900
300
300
0
$1,950
$1,950
$1,300
Totals
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© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
Exercise 7-3
Medicare
Tax
OASDI
Tax
$1,950 $1,950
X 1.45% X 6.2%
$28.28 $120.90
FUTA Tax SUTA Tax
$1,300
X .8%
$10.40
$1,300
X 5.6%
$78.62 =$238.20
LO-2
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
Exercise 7-6
Gross Pay
(subject to
Medicare)
Earnings
Subject to
OASDI
Earnings
Subject to
FUTA
Earnings
Subject to
SUTA
$160,000
X 1.45%
$130,000
X 6.2%
$100,000
X.8%
$100,000
X5.9%
$2,320
$8,060
$800
$5,900
$17,080
LO-2
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Publishing, College Accounting: A
Practical Approach, 11e by Slater
Learning Objective 3
Preparing a payroll register
LO-3
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Publishing, College Accounting: A
Practical Approach, 11e by Slater
Payroll Register
Includes each employee’s
 Gross earnings
 Employee withholding taxes
 Net pay
 Taxable earnings
 Cumulative earnings
 Accounts to be charged
LO-3
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Payroll Register
Some companies will do two registers one for hourly employees & one for
salaried
 Includes all employee names and social
security numbers

LO-3
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
Learning Objective 4
Maintaining an employee earnings record
LO-4
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Publishing, College Accounting: A
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Employee Earnings Record
Summary of each employee’s
◦
◦
◦
◦

Earnings
Withholding taxes
Net pay
Cumulative earnings
Used to prepare quarterly and annual
payroll tax reports
LO-4
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater
End of Chapter 7
© 2010 Prentice Hall Business
Publishing, College Accounting: A
Practical Approach, 11e by Slater