Unit 3
Accounting for a Payroll System
Chapter 12 Payroll Accounting
Chapter 13 Payroll Liabilities and Tax Records
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Chapter 12
Payroll Accounting
What You’ll Learn
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Explain the importance of accurate payroll records.
Compute gross pay using different methods.
Explain and compute employee-paid withholdings.
Compute net pay.
Prepare payroll registers.
Explain the methods of distributing payroll funds.
Prepare an employee’s earnings record.
Define the accounting terms introduced in
this chapter.
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Chapter 12, Section 1
Calculating Gross Earnings
What Do You Think?
What kinds of earnings might contribute to an
employee’s gross earnings?
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SECTION 12.1
Calculating Gross Earnings
Main Idea
Gross earnings is the total amount an employee earns in
a pay period.
You Will Learn
 the two main functions of a payroll system.
 the different methods of computing gross pay.
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Calculating Gross Earnings
SECTION 12.1
Key Terms
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payroll
pay period
payroll clerk
gross earnings
salary
wage
time card
electronic badge readers
commission
piece rate
overtime rate
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SECTION 12.1
Calculating Gross Earnings
Using a Payroll System
A payroll is a list of employees and payments due to
each employee for a specific pay period. Businesses
with many employees can have a payroll clerk.
A well-designed payroll system achieves the following
goals:
 The collection and processing of all information
needed to prepare and issue payroll checks.
 The generation of payroll records needed for
accounting purposes and for reporting to
government agencies, management, and others.
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SECTION 12.1
Calculating Gross Earnings
Computing Gross Pay
The amount of money an employee earns in a pay
period is called gross earnings, or gross pay.
Employees are grouped into different pay categories to
help the employer compute the gross pay:
 salary
 hourly wage
 commission
 salary plus commission or bonus
 piece rate
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SECTION 12.1
Calculating Gross Earnings
Salary
A common method of paying employees is by salary, a
fixed amount of money paid each pay period regardless
of the number of hours worked.
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SECTION 12.1
Calculating Gross Earnings
Hourly Wage
Another common method of paying employees is the
hourly wage, an amount of money paid at a specified
rate per hour worked. Employees are sometimes
required to use a time card to record hours worked.
Some businesses use electronic badge readers to
track employees’ work hours.
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SECTION 12.1
Calculating Gross Earnings
Commission
Sales employees are often paid a commission, a
percentage of the employee’s sales.
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SECTION 12.1
Calculating Gross Earnings
Salary Plus Commission or Bonus
Some sales employees are paid a base salary plus a
commission or bonus based on their sales.
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SECTION 12.1
Calculating Gross Earnings
Piece Rate
Employees receive piece rate when they are paid for
each item they produce.
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SECTION 12.1
Calculating Gross Earnings
Overtime Pay
Employers are generally required to pay overtime when
employees work more than 40 hours per week. The
overtime rate, as set by the Fair Labor Standards Act of
1938, is 1.5 times the employee’s regular pay rate.
Salaried employees are sometimes entitled to overtime
pay as well.
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SECTION 12.1
Calculating Gross Earnings
Key Terms Review
 payroll
A list of the employees and the payments due to
each employee for a specific pay period.
 pay period
The amount of time over which an employee is
paid.
 payroll clerk
An employee responsible for preparing the
payroll.
 gross earnings
The total amount of money an employee earns in
a pay period; also called gross pay.
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SECTION 12.1
Calculating Gross Earnings
Key Terms Review
 salary
A fixed amount of money paid to an employee for
each pay period.
 wage
An amount of money paid to an employee at a
specified rate per hour worked.
 time card
A record of the time an employee arrives at work,
leaves work, and the total number of hours
worked each day.
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SECTION 12.1
Calculating Gross Earnings
Key Terms Review
 electronic badge readers
An electronic device that scans the magnetic strip
containing employee information on an
employee’s identification badge and then
transfers the information directly to a computer.
 commission
An amount paid to an employee based on a
percentage of the employee’s sales.
 piece rate
A rate of pay based on the number of items
produced.
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SECTION 12.1
Calculating Gross Earnings
Key Terms Review
 overtime rate
Pay rate employers are required to pay certain
employees covered by state and federal laws; the
Fair Labor Standards Act of 1938 sets the rate at
1.5 times the regular hourly rate after 40 hours
per week.
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Chapter 12, Section 2
Payroll Deductions
What Do You Think?
What is the purpose of having your employer withhold
amounts from your paycheck?
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SECTION 12.2
Payroll Deductions
Main Idea
Payroll deductions are amounts withheld from an
employee’s gross earnings.
You Will Learn
 the deductions required by law.
 the deductions an employee can choose.
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SECTION 12.2
Payroll Deductions
Key Terms
 deduction
 withholding allowance
 401(k) plan
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SECTION 12.2
Payroll Deductions
Deductions Required by Law
An amount subtracted from gross earnings is a
deduction. Deductions include those required by law
and those an employee wishes to have withheld.
An employer is required by law to withhold payroll taxes.
These taxes include:
 Federal income tax
 Social security tax
 City and state income tax
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SECTION 12.2
Payroll Deductions
Deductions Required by Law
Federal Income Tax
Employers withhold income tax based on the estimated
income tax the employee will owe. If too much is
withheld the Internal Revenue Service (IRS) refunds the
overpayment.
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SECTION 12.2
Payroll Deductions
Form W-4
The amount of income tax withheld depends on:
 the employee’s marital status
 the number of allowances the employee claims
 the employee’s gross earnings
The first two items are found on the employee’s Form
W-4 (Employee’s Withholding Allowance Certificate).
A withholding allowance reduces the amount of
income tax withheld.
Some employees are exempt from tax withholding.
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SECTION 12.2
Payroll Deductions
Form W-4
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SECTION 12.2
Payroll Deductions
Tax Tables
IRS tables can be used to determine the amount of
federal tax to withhold. There are many tax tables
available.
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SECTION 12.2
Payroll Deductions
Deductions Required by Law
Social Security Tax
Social security taxes are also collected by employers.
The Federal Insurance Contributions Act (FICA)
established social security taxes in 1935.
FICA taxes have two components:
 social security–provided as old age and disability
insurance and survivors’ benefits
 Medicare–provides health insurance for people
who are elderly or disabled
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SECTION 12.2
Payroll Deductions
Deductions Required by Law
State and Local Income Taxes
Many states and some cities tax earnings of people who
live or work within their boundaries.
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SECTION 12.2
Payroll Deductions
Voluntary Deductions
Employers can also deduct voluntary amounts from their
employee’s check at the employee’s request. These
types of deductions can include:
 union dues
 health insurance payments
 life insurance payments
 U.S. savings bonds
 charitable contributions
 pensions
 credit union deposits and payments
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SECTION 12.2
Payroll Deductions
Voluntary Deductions
The 401(k) plan is a popular voluntary payroll deduction
that allows employees to save tax-free dollars for
retirement.
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SECTION 12.2
Payroll Deductions
Key Terms
 deduction
An amount that is subtracted from an employee’s
gross earnings.
 withholding allowance
An allowance an individual claims on a Form W-4;
it is used to calculate the amount of income tax
withheld from an employee’s paycheck.
 401(k) plan
A voluntary payroll deduction from gross
earnings; the employee does not pay income tax
on the amount contributed until the money is
withdrawn from the plan, usually after age 59 ½.
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Chapter 12, Section 3
Payroll Records
What Do You Think?
What might happen if a company did not keep accurate
records of payroll?
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Payroll Records
SECTION 12.3
Main Idea
Businesses must keep accurate payroll records to
comply with federal and state laws.
You Will Learn
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what a payroll register is and how to prepare one.
how employees receive their pay.
how to maintain employees’ earnings records.
how owners and managers use payroll
information to make decisions.
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Payroll Records
SECTION 12.3
Key Terms
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payroll register
net pay
direct deposit
employee’s earnings record
accumulated earnings
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SECTION 12.3
Payroll Records
Preparing the Payroll Register
A payroll register helps employers keep accurate
payroll records. Payroll registers consist of seven parts:
1. Total Hours Column
2. Rate Column
3. Earnings Section
4. Deductions Section
5. Net Pay Column
6. Check Number Column
7. Column Totals
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SECTION 12.3
Payroll Records
Preparing the Payroll Register
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SECTION 12.3
Payroll Records
Paying Employees
Small businesses write payroll checks straight from the
company’s regular checking account. Large businesses
have a separate payroll checking account to issue
payroll checks. Employees can be paid by check or by
direct deposit (net pay is electronically deposited in the
employee’s personal bank account).
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SECTION 12.3
Payroll Records
The Employee’s Earning Record
An employer must also keep an employee’s earnings
record. The earnings record and the payroll register
have the same amount columns. In addition, it has the
accumulated earnings column, an employee’s year-todate gross earnings.
Many companies use computers and special software to
prepare payroll to reduce errors and improve
productivity.
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SECTION 12.3
Payroll Records
Managerial Implications for Payroll
Accounting
Because wages and salaries are a large part of a
company’s expenses, accurate payroll records are
important. Payroll records can be used
 to determine if overtime is justified, and
 to compare actual amounts to budgeted amounts
to reveal unplanned overtime.
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SECTION 12.3
Payroll Records
Key Terms Review
 payroll register
A form that summarizes information about
employees’ earnings for each pay period.
 net pay
The amount left after total deductions have been
subtracted from gross earnings.
 direct deposit
Depositing net pay directly into an employee’s
personal bank account through electronic funds
transfer.
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SECTION 12.3
Payroll Records
Key Terms Review
 employee’s earnings record
A record prepared for each employee that
contains all payroll information related to the
employee; it is kept on a quarterly basis.
 accumulated earnings
The employee’s year-to-date gross earnings.
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CHAPTER 12
Chapter 12 Review
Question 1
Wayne Hanson is paid $9 per hour. He worked 44 hours
last week. In addition, he receives time and one-half for
overtime. Calculate his gross pay for the week.
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CHAPTER 12
Chapter 12 Review
Answer 1
Step 1: Multiply his regular pay by the number of
hours worked ($9.00  40 = $360.00).
Step 2: Calculate the overtime rate by multiplying the
regular hourly wage by 1.5 ($9.00  1.5 =
$13.50).
Step 3: Multiply the number of overtime hours by the
overtime rate(44 - 40 = 4 hours of overtime; 4
 $13.50 = $54.00).
Step 4: Add the regular pay and the overtime pay
($360.00 + $54.00 = $414.00).
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CHAPTER 12
Chapter 12 Review
Question 2
What are at least three pieces of information you can
learn from your weekly payroll check?
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CHAPTER 12
Chapter 12 Review
Answer 2
Among the important facts you can find from your
weekly payroll check are these:
1. The time period in which the work was performed.
2. The total number of regular hours.
3. The total number of overtime hours.
4. Total gross pay.
5. Amount of Medicare tax withheld.
6. Amount of social security tax withheld.
7. Amount of federal income tax withheld.
8. Amount of state income tax withheld.
9. Any voluntary deductions withheld.
10. Total net pay.
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