Payroll Accounting
Chapter 12
Calculating Gross Earnings
• Using a Payroll System
– Payroll is a list of the employees and the payments due to
each employee for a specific pay period.
– Pay period is the amount of time over which an employee
is paid.
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Weekly
Biweekly
Semimonthly
Monthly
• A payroll system:
1. Collects and processes all information needed to prepare
and issue payroll checks
2. Generates payroll records for accounting and reporting
purposes
Pg 310
Payroll Clerks
• Businesses with many employees often hire a
payroll clerk. Their responsibilities usually
include:
– Making sure employees are paid on time
– Making sure each employee is paid the correct
amount
– Completing payroll records
– Submitting payroll reports
– Paying payroll taxes
Pg 310
Computing Gross Pay
• Gross Earnings (pay) – the total amount of money
earned by an employee for time spent working
during a pay period. Accountants refer to this as
Salary Expense
– Salary
– Hourly Wage
– Commission
– Salary plus commission or bonus
– Piece rate
*Some employees are entitled to overtime pay
Pg 311
Salary
• Salary – a fixed amount of money paid for a fixed
amount of time regardless of the number of
hours worked in that time period
– Many managers are paid salary and expected to get a
certain amount of work done within a time period
without concern for the amount of time it actually
takes to complete it
– Ex: Paula earns $2,000 a month. Some months she
works 160 hours and some she works 170 hours but
still is paid $2,000 for the work that is expected.
Pg 311
Hourly Wage
• Wage – an amount of money paid to an employee at a
specified rate per hour worked.
• The hourly rate is multiplied by the hours worked to come
up with a gross pay
– Hours are usually recorded in increments of quarters (every 15
minutes) and rounded to the nearest
– Ex. $7.25 per hour * 13.75 hours = $99.69 gross pay
• Hours worked are usually recorded on a time card that
keeps track of time in and time out of an employee.
• Electronic Badge Readers – The employee scans his/her
badge and the computer records the time in and out.
Pg 312
Other Methods of Pay
Pg 314
• Commission – an amount paid to an employee based on a
percentage of the employee’s sales.
– Commission encourages employees to sell more because their
compensation is in direct correlation to the amount they sell.
• Salary Plus Commission – an employee is paid a set amount
and then can earn additional pay based on sales
• Piece Rate – manufacturing companies pay employees
based on the number of items produced.
• Overtime Pay – an additional amount paid to hourly
employees when they work more than the legal limit of
standard pay. (1.5 x’s hourly rate for any hours over 40 per
week.)
Payroll Deductions
• Deductions – an amount subtracted from gross
earnings
– Federal Income Tax – a tax based on earnings
• Form W-4 – Filled out by the employee to help determine
how much money will be deducted.
– Marital status
– Number of allowances (withholding allowance)
– Gross earnings
• Withholding Allowance – the more allowance you claim, the
less you have deducted
• Tax Tables help you determine how much money should be
deducted each pay period
Pg 316
W-4 Form
Pg 316
Federal Tax
Withholdings
Table
FICA Taxes
– FICA Taxes are a set percent of total earnings
• Social Security Tax – provides funding to certain
individuals
– The old and disabled
– Survivors of deceased workers
• Medicare Tax – finances health insurance benefits for
people who are elderly or disabled.
Ex.
Social security tax
Medicare tax
Total FICA taxes
6.20%
1.45%
7.65%
State and Local Income Taxes
• Most states have an income tax in addition to
the federal income tax and FICA taxes.
• Some communities (cities) have an additional
tax in addition to the federal income tax and
FICA taxes.
Voluntary Deductions
• Employers will usually agree to withhold
additional amounts from and employee’s check
until otherwise notified not to.
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Union Dues
Health insurance payments
Life insurance payments
Pension and other retirement contributions
Credit union deposits and payments
U.S. savings bonds and charitable contributions
• 401(k) plan – a popular voluntary payroll
deduction that is a pre-tax retirement
contribution.
Preparing the Payroll Register
• Payroll Register – a form that summarizes information about
employee’s earnings for each pay period.
– Identification information
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Employee’s I.D. number
Name
Marital status
Number of allowances claimed
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Total Hours
Rate of pay
Earnings (regular, overtime, total)
Deductions
Net Pay – How much the is left after deductions have been subtracted
from Gross Pay
– Check number
– Totals
Pg 321
Payroll Register
Pg 320
Paying Employees
• Payroll checks are issued to employees
– If a small company then many times employees are
paid from the general account
– If several employees, most companies will have a
separate payroll bank account. The total amount of
the payroll is transferred to the payroll account and
then checks are issued using the money in that
account
• Payroll checks have stubs attached showing the
gross earnings, deductions and net pay
• Direct Deposit – If an employee has direct
deposit, then they are give proof of the deposit
and a list of deductions
Pg 322
Payroll Stub
Pg 322
The Employee’s Earnings Record
• Employee’s Earnings Record is a file on each
employee documenting his/her pay and
deductions
• Accumulated Earnings is also listed on the
employee’s earnings record. It is a running
total of earnings for the year.
• Businesses usually keep these on a quarterly
basis and then carry the totals forward to a
new record.
Pg 323
Employee’s Earnings Record
Pg 324
Managerial Implications for Payroll
Accounting
• Wages and salaries are a large part of a
company’s expenses.
– They should be done with the utmost care
– The process should have internal controls to
prevent errors
Pg 324