09 Payroll Accounting
It's a fact of business–if a company has employees, it has
to account for payroll and fringe benefits.
In this explanation of payroll accounting we'll
introduce payroll, fringe benefits, and the payrollrelated accounts that a typical company will report
on its income statement and balance sheet.
Payroll and benefits include items such as:
•salaries
•wages
•bonuses & commissions to employees
•overtime pay
•payroll taxes and costs
•Social Security
•Medicare
•federal income tax
•state income tax
•state unemployment tax
•federal unemployment tax
•worker compensation insurance
employer paid benefits
•holidays
•vacations
•sick days
•insurance (health, dental, vision, life, disability)
•retirement plans
•profit-sharing plans
Many of these items are subject
to state and federal laws; some
involve labor contracts or
company policies.
Salaries are usually associated with "whitecollar" workers such as office employees,
managers, professionals, and executives.
Salaried employees are often paid semimonthly (e.g., on the 15th and last day of the
month) or bi-weekly (e.g., every other Friday)
and their salaries are often stated as a gross
annual amount, such as "$48,000 per year."
The "gross" amount refers to the pay an
employee would receive before withholdings
are made for such things as taxes,
contributions to United Way, and savings plans.
Since salaried employees earn a specified
annual amount, it is likely that their gross pay
for each pay period is the same recurring
amount. For example, if a manager's salary is
$48,000 per year and salaries are paid semimonthly, the manager's gross pay will be $2,000
for each of the 24 pay periods.
(If the manager is paid bi-weekly, the gross pay
would be $1,846.15 for each of the 26 pay
periods.) A salaried employee's work period
usually ends on payday; for example, a
paycheck on January 31 usually covers the work
period of January 16–31. This is convenient for
accounting purposes if the company prepares
financial statements on a calendar month basis.
Wages are often associated with production
employees (sometimes referred to as "bluecollar" workers), non-managers, and other
employees whose pay is dependent on hours
worked.
The pay for these employees is generally
stated as a gross, hourly rate, such as "$13.52
per hour." Again, the "gross" amount refers to
the pay an employee would receive before
withholdings are made for such things as
taxes, contributions, and savings plans.
Employees receiving wages are often paid
weekly or biweekly. To determine the gross
wages earned during a work period, the employer
multiplies each employee's hourly rate times the
number of work hours recorded for the employee
during the work period.
Due to the extra time needed to make
calculations for each employee, hourly-paid
employees typically receive their paychecks
approximately five days after the work period has
ended.
Overtime Pay
Overtime refers to time worked in excess of 40
hours per week (36 h ). Whether or not employees
are paid for overtime depends on each employee's
job responsibilities and rate of pay—some
employees are exempt from overtime pay and
some are not.
For example, executives are considered to be
"exempt"; their employers are not required to pay
them for their overtime hours because (1) their
compensation is high, and (2) they can control their
work hours. Executives do not need state or federal
wage and hour laws to protect them from company
abuse.
Overtime Premium
An overtime premium refers to the "half" portion
of "time-and-a-half" or "time-and-one-half"
overtime pay. For example, assume an employee
in the production department is expected to work
40 hours per week at $10 per hour. If the employer
requires the employee to work 42 hours in a given
week, the extra two hours are paid at time-and-ahalf and the employee earns a total of $430 for the
week (40 hours × $10 per hour, plus 2 overtime
hours × $15 per hour). It can also be computed as
42 hours at the straight-time rate of $10 per hour
plus 2 hours times the overtime premium of $5 per
hour.
The income tax system—as well as most state
income tax systems—requires employers to
withhold payroll taxes from their employees' gross
salaries and wages. The withholding of taxes and
other deductions from employees' paychecks
affects the employer in several ways: (1) it reduces
the cash amount paid to employees, (2) it creates a
current liability for the employer, and (3) it requires
the employer to remit the withheld taxes to the
federal and state government by specific
deadlines. Failure to remit payroll taxes in a timely
manner results in interest and penalties levied on
the employer; flagrant violations trigger more
severe consequences.
Payroll withholdings include:
•Employee portion of Social Security tax
•Employee portion of Medicare tax
•Federal income tax
•State income tax
•Court-ordered withholdings
•Other withholdings
A key component of payroll accounting
is the Social Security tax (The Social
Security tax along with the Medicare tax
make up what is referred to as FICA).
Social Security tax is withheld from an
employee's salary or wages and is
matched by a contribution from the
employer. In other words, the employer
is responsible for remitting to the federal
government two times the amount of
Social Security tax withheld from each
employee.
As a result, Social Security tax is both an
employee withholding and an employer
expense. (The official title for the system
financed by the Social Security tax is Old
Age, Survivors and Disability Insurance, or
OASDI.
As the name indicates, this system pays
retirement, disability, family, and survivors'
benefits.)
In 2010, the amount of Social Security tax that an employer
must withhold from an employee is 6.2% of the first $106,800
of the employee's annual wages and salary; any amount
above $106,800 is not subject to Social Security tax
withholdings.
For example:
If an employee earns $40,000 in wages in 2010, the entire
$40,000 is subject to withholdings at 6.2%, for a total annual
withholding of $2,480.
If an executive earns $300,000 in salary in 2010, only the first
$106,800 of the salary is subject to the Social Securuity tax of
6.2%, for a total annual withholding of $6,621.60. (The
remaining $193,200 of salary is not subject to Social Security
tax withholdings, although it will be subject to the Medicare
tax discussed in the next section.)
The amount withheld—and the employer's
matching amount—are reported as a
current liability until the amounts are
remitted to the government by the
employer.
Medicare tax is also withheld from an employee's
salary or wages and is matched by a contribution
from the employer. In other words, the employer is
responsible for remitting to the federal government
two times the amount of Medicare tax withheld from
each employee. As a result, Medicare tax is both
an employee withholding and an employer
expense.
(The Medicare program helps pay for hospital care,
nursing care, and doctor's fees for people age 65
and older as well as for some individuals receiving
Social Security disability benefits.)
The combination of the Social Security tax and
the Medicare tax is referred to as FICA (an
acronym for Federal Insurance Contribution Act).
An employer must withhold 1.45% of each
employee's annual wages and salary for
Medicare tax. Unlike the Social Security tax, this
percentage is applied on every employee's total
salary no matter how large the salary might be—
an executive's salary of $300,000 has Medicare
tax withholdings of $4,350 (the entire $300,000
times 1.45%).
The amount withheld—and the employer's
matching amount—are reported as a
current liability until the amounts are
remitted to the government by the
employer.
4. State income tax
In most states payroll accounting will involve
a state income tax. In those states an
employer is required to withhold the state
income tax that an employee is expected to
owe based on salaries or wages. Like its
federal counterpart, the amount withheld is
rarely the exact amount of income tax that
the employee will owe to the state
government. (It should be noted here that
some states do not levy a personal income
tax.)
15 % (17 %) - in Ukraina