Business Accounting
Chapter 12
Importance of Payroll Records
• Required by law
–keep accurate payroll records
–report employee earnings
–pay payroll taxes
• Keep employees happy
• Huge expense
The Payroll System
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Calculate Earnings
Calculate Deductions
Prepare Payroll Checks
Report Payroll Info to Government
Update the Payroll and Accounting Records
Payroll:
• list of employees and
payments due to each employee
for specific pay period
Pay Period:
• amount of time over which employee is paid
– weekly
– biweekly (every other Friday)
– semimonthly (the 1st and the 15th)
– monthly
Payroll Clerk:
• prepares payroll
Calculating Gross Earnings
• Gross Earnings:
– amount of money earned for working
Wage:
• usually for manual or unskilled labor
• regular hours worked * hourly pay rate
Time Card
• records arrival and departure times
– written in manually or punched in on time clock
– usually rounded to the nearest quarter hour
Electronic Badge Reader
• used for greater accuracy to the minute
– id card is swiped through an electronic reader
– recorded info is uploaded to payroll computers
Salary:
• usually for managers and supervisors
• set amount of annual pay
– (not based on hours worked)
Commission:
• paid a percentage of sales
Salary Plus:
• base salary plus commission on sales
Bonus:
• special pay for meeting certain performance
standards
Overtime:
• (hrs worked > 40 per week) * hourly rate * 1.5
– Fair Labor Standards Act of 1938
– some employees are exempt from overtime laws
Payroll Deductions
• amounts subtracted (withheld)
from gross earnings
Deductions Required by Law:
• Federal Income Tax Withholding
– based on estimate of actual income tax
to be owed at end of year
• employee prepares Form W-4 for employer
specifying:
– marital status
– allowances
• usually one allowance for you and each dependent
• more allowances equals less withholding
• must withhold at least 90% of total tax liability or pay
penalty
Calculating federal Withholding
• employer uses a tax table from IRS to
determine how much to withhold
• employer withholds money and forwards to
the government for the employee
– acts as a collection agent
• some employees are exempt from withholding
if all the following apply:
– no tax liability last year
– expects no liability this year
– if income more than $700 and includes nonwage
income, and not claimed as dependent on
someone else’s tax return
FICA
• Federal Insurance Contribution Act of 1935
• Social Security provides income to retired and
disabled persons
• Medicare provides health insurance for the
elderly
• Tax rates are set by Congress
(can change at any time)
– Social Security 6.2%
• on income up to $110,000 in 2010
up to $ 94,200 in 2005
– Medicare 1.45%
– State and Local Taxes
• some states use tables and some use rates
– Illinois uses a rate of 3%
• some states do not charge income tax
Voluntary Deductions
• amounts that the employee asks the employer
to withhold and forward for the employee
union dues
• easier for the union
– one payment from employer,
not payments from thousands of employees
insurance premiums
• employees contribute a part or all of the
premium
– health
– life
– disability
pensions
• if a company still has an open pension plan
– employees contribute percentage
• if they want to participate
401(k) or 403(b)
• named after an IRS code section
• one of the greatest inventions of all time
– invest pretax dollars
– grow tax deferred
– possibly get company match
• free money
direct deposits
– net pay is electronically deposited
into bank account
on pay day
charitable contributions
• automatic way to give back to community
GROSS EARNINGS
–
DEDUCTIONS
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NET PAY (TAKE-HOME PAY)
Payroll Records
• Payroll Register
• Employee’s Earnings Record
Payroll Register
• summarizes information
– all the employees’ earnings
for each period
• source document for payroll checks
• source document for payroll journal entry
Employee’s Earnings Record
• all payroll information for one employee
• includes column for accumulated earnings
• totaled on a quarterly basis