Chapter 8
Employer Taxes,
Payments, and Reports
1
College Accounting
10th Edition
McQuaig
McQuaig
Bille
Bille
Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
8–1
© 2011 Cengage Learning
Employer Identification
Number (EIN)
 Everyone must have a Social Security
number or an Individual Taxpayer
Identification Number (ITIN).
 Employers of one or more persons are
required to have an Employer
Identification Number (EIN), and it must
be listed on all reports and payments of
employees’ federal income tax withholding
and FICA taxes.
8–2
Employer’s Payroll Taxes
 An employer’s payroll taxes are based on the gross
wages paid to employees.
 Payroll taxes are an expense of doing business.
 A company would debit Payroll Tax Expense for the
company’s portion of FICA taxes and for state and federal
unemployment taxes.
Payroll Tax Expense
+
–
FICA tax (employer’s
Closed at the end of the
matching portion)
year along with all other
expense accounts
State unemployment tax
Federal unemployment tax
8–3
Employer’s Matching
Portion of FICA Tax
 FICA tax is imposed equally on both
employer and employee.
 The employer’s share is determined by
multiplying the employer’s tax rate by the
taxable earnings.
 The accountant obtains the Social Security
and Medicare taxable earnings amounts
from the payroll register.
8–4
Employer’s Matching
Portion of FICA Tax
FICA Tax Payable is often
used for both the tax liability of
the employer and the amounts
withheld from the employees.
8–5
Employer’s State
Unemployment Tax
The proceeds of the state unemployment tax (SUTA),
which is levied only on the employer in most states, are used
to pay subsistence benefits to unemployed workers.
Green Sales Company is subject to a rate of 5.4 percent of
the first $7,000 of each employee’s earnings. Accordingly,
$958.20 of earnings are subject to this tax.
8–6
Employer’s Federal
Unemployment Tax
The federal unemployment tax (FUTA) is paid only by the
employer.
Green Sales Company is subject to a rate of .8 percent of the
first $7,000 of each employee’s earnings (the same amount
of earnings that is used for SUTA).
8–7
Steps for Recording the Payroll
STEP 1. Record the payroll for the present
period in the payroll register.
STEP 2. Based on the payroll register, record
the payroll entry in the journal.
STEP 3. Based on the Taxable Earnings
columns of the payroll register, record
Payroll Tax Expense in the journal.
STEP 4. Record a journal entry to pay the
employees.
8–8
Recording Employer’s
Payroll Taxes
STEP 1
8–9
STEP 2
8–10
STEP 3
STEP 4
8–11
Payments of FICA Tax and
Employees’ Federal Income
Tax Withholding
A federal tax deposit includes the combined total
of three items:
1) Employees’ federal income taxes withheld
2) Employees’ FICA taxes (Social Security and
Medicare)
3) Employer’s share of the FICA taxes Social
Security and Medicare)
8–12
Payments of FICA Tax and
Employees’ Federal Income
Tax Withholding
Employers submit a return, Form 941, every
quarter (three consecutive months). The due
dates for filing this return are as follows:
8–13
Federal Tax Deposit Coupon
From the October 7 payroll for Green Sales Company, we
determine the following taxes are owed:
Employees’ federal income taxes withheld
$2,378.24
Employees’ FICA taxes withheld ($1,158.73 + $272.60) 1,431.33
Employer’s share of FICA taxes
1,431.31
Total federal undeposited taxes
$5,240.88
The October 14 payroll for Green Sales Company has the
same taxes as the October 7 payroll. The combined taxes
for the two weeks would be:
Employees’ federal income taxes withheld
Employees’ FICA taxes withheld
Employer’s share of FICA taxes
Total federal undeposited taxes
$ 4,756.48
2,862.66
2,862.62
$10,481.76
8–14
Deposit of Two-Weeks’ Taxes
8–15
Payments of State
Unemployment Insurance
The state tax is usually paid quarterly and is due
by the end of the month following the end of the
quarter (the same due dates for Form 941).
Green Sales Company makes the journal entry for
the first quarter (covering the months of January,
February, and March). The taxable amount for this
quarter was $70,325, so the tax is $3,797.55
($70,325 x 0.054).
8–16
Payments of State
Unemployment Insurance
8–17
Payments of Federal
Unemployment Insurance
 The FUTA tax is calculated quarterly, during the
month following the end of each calendar
quarter.
 If the accumulated tax liability is greater than
$500, the tax is deposited in a financial
institution, accompanied by a preprinted federal
tax deposit card.
 The due date for this deposit is the last day of
the month following the end of the quarter.
8–18
Recall that at the end of the first quarter, Green
Sales Company had $70,325 that was taxable. The
amount of the tax was $562.60 ($70,325 x 0.008).
8–19
Deposits of Employees’ State
Income Tax Withholding
8–20
Employer’s Quarterly Federal
Tax Return (Form 941)
• The purpose of Form 941, Employer’s
Quarterly Federal Tax Return, is to report the
tax liability for withholdings of employees’
federal income tax and FICA taxes, and also
the employer’s share of FICA taxes.
8–21
Wage Withholding Statements
for Employees (Form W-2)
 After the end of a year (December 31) and by
the following January 31, the employer must
furnish for each employee a Wage and Tax
Statement, known as Form W-2.
 The source of the information used to complete
Form W-2 is the employee’s individual
earnings record.
8–22
Employer’s Annual Federal
Income Tax Reports (Form W-3)
 Form W-3, Transmittal of Wage and Tax
Statements, is sent with the accompanying
Copy A of the employees’ W-2 form to the
Social Security administration.
 This form is due on February 28, following the
end of the calendar year.
 The amounts shown on Form W-3 must be the
same as the grand totals of the W-2 forms and
the four quarterly 941 forms.
8–23
Reports and Payments of
Federal Unemployment Tax
 Generally all employers are subject to the
Federal Unemployment Tax Act.
 These employers must submit an Employer’s
Annual Federal Unemployment (FUTA) Tax
Return, Form 940, no later than January 31
following the close of the calendar year.
 This deadline may be extended until February
10 if the employer has made deposits paying
the FUTA tax liability in full.
8–24
Reports and Payments of
Federal Unemployment Tax
Federal unemployment taxable earnings by
quarter for Green Sales Company are as follows:
8–25
8–26
Workers’ Compensation Insurance
 Most states require employers to provide
workers’ compensation insurance either
through plans administered by the state or
through private insurance companies authorized
by the state.
 This insurance provides industrial accident
insurance for employees killed or injured on the
job.
 Generally, the employer pays a premium in
advance, based on the estimated payroll.
8–27
Workers’ Compensation Insurance
At the beginning of the year, the firm’s accountant computed
the estimated premium as follows:
8–28
Workers’ Compensation Insurance
At the end of the year, the exact premium is $3,646.19.
Therefore, the amount of the unpaid premium is $73.19,
calculated as follows:
Total exact premium
Less total estimated premium paid
Additional premium owed
$3,646.19
3,573.00
$ 73.19
8–29
Workers’ Compensation Insurance
The accountant determines the amount of the adjustment is
$73.19 [$3,646.19 (total exact premium) – $3,573.00 (total
estimated premium paid)]. The accountant then makes an
additional adjusting entry for the extra premium.
8–30
Adjusting for Accrued
Salaries and Wages
Assume that $2,400 of wages accrued for the
time between the last payday and the end of the
year. An adjusting entry is necessary.
8–31
Adjusting Entry for Accrual
of Payroll Taxes
 The following taxes come under the umbrella
of the Payroll Tax Expense account:
 Employer’s share of the FICA tax
 State unemployment tax
 Federal unemployment tax
 The employer becomes liable for these taxes
only when the employees are actually paid.
8–32
Types of Payroll Fraud
1. Ghost employee fraud—Someone is
recorded in the payroll system who does
not work for the business.
2. False wage claim fraud—Extra hours or
other relevant factors are added to wage
information to increase the amount of
pay.
3. False expense reimbursement fraud—
Improper claims are made for the
reimbursement of expenses.
8–33
Internal Controls to Prevent and
Detect Payroll Fraud
1. Require mandatory vacations.
2. Use cash payments or checks minimally and increase
the use of direct deposit of payroll checks.
3. Require proper identification to receive paychecks.
4. Conduct periodic unannounced audits.
5. Cross-reference the payroll roster for duplicate
addresses or Social Security numbers.
6. Conduct a thorough pre-employment reference check
for all payroll personnel.
7. Compare payroll expense per the payroll register to the
payroll deposit made.
8. Outsource payroll administration.
8–34