Accounting for Payroll: Employee Earnings
and Deductions
Chapter 11
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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.
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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.
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Learning Objective 1
Describe the importance of payroll records
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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
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The distinction between employees and independent
contractors is important.
Employees
 Under the direct control of an employer on a
continuing basis
 Payroll accounting applies
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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
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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
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Establishes standards for
 Minimum wage
 Overtime pay
 Child labor
 Required payroll record keeping
 Equal pay for equal work regardless of sex
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Administered by the Wage and Hour Division of the
US Department of Labor
Applies only to firms engaged in interstate
commerce
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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
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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
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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.
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Usually factory workers
Pays a certain rate for each unit worker completes
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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
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=
$288.00
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Learning Objective 2
Calculate gross earnings for employees
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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.
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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
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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
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Learning Objective 3
Explain the nature of payroll deductions
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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
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 Voluntary deductions include
• Amount for insurance premiums
• Charities
• Retirement plans
• Union dues
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Learning Objective 4
Calculate payroll deductions and net pay
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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.
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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%
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No maximum wage base for HI taxes; all earnings are
subject to HI regardless of the amount.
HI tax rate = 1.45%
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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
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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.
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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
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HI
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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.
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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
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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.
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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.
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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
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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.
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Other deductions include amounts
 Donated to charities
 For health and life insurance or union dues
 Invested in US savings bonds or retirement plans
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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.
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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
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Sam’s net pay is equal to his gross pay less all his
deductions:
$360 – $70.54 = $289.46
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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.
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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
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Learning Objective 5
Complete the payroll register and use
it to record and pay the payroll
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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
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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
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A summary of the gross earnings, deductions, and
net pay for all employees for a specific payroll
period.
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The Status column shows the employee’s marital status
and the number of withholding allowances being claimed
by the employee.
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The employee’s year-to-date earnings before this
payroll are recorded in the Cumulative Earnings
column.
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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.
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These amounts are not taxes, but amounts
subject to the tax rates.
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These columns show the amounts withheld from the pay
of employees.
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Take-home pay
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A record maintained for each employee that contains
basic employee information and a summary of
payroll data for that employee.
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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.
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Computerized system
 Increase processing speed and accuracy
 Generate payroll reports automatically
 Can save the payroll personnel hours of tedious,
repetitive payroll calculations
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Learning Objective 6
Make accounting entries for
employee earnings and deductions
and for payment of the payroll
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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
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An operating expense account used to record the
gross amount of the payroll
Expense accounts are
always debited to show
an increase.
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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
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Liability accounts are
always credited to show
an increase and debited
to show a decrease.
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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
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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
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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
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20X3
1 Nov. 18 Sales Salaries Expense
205500
1
Office Salaries Expense
140900
2
2
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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
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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.
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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.
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- liability
- asset
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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.
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Review Quiz 11-6
The following is the entry to record the payment of the
payroll from Review Quiz 11-5.
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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?
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Joining the Pieces
Procedures for
Recording the
Payroll
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