ANALYZING & JOURNALIZINGANALYZING & JOURNALIZINGPAYROLL TRANSACTIONSPAYROLL TRANSACTIONS

Payroll Accounting 2009 Payroll Accounting 2009

Bernard J. Bieg and Judith A. TolandBernard J. Bieg and Judith A. Toland

Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS

Payroll requires entering data (in order) in the following places: Payroll Register Employee Earnings Records General Journal

Journalize gross wages and withholdings Journalize payroll taxes and workers’

compensation Journalize period-end accruals

Post to General Ledger

Payroll register lists employees in rows and shows following information for each Gross wages Taxes withheld and other deductions Net pay

Payroll register shows (in columns) Total of gross wages, each deduction and net

When completed, should “foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number

*Use payroll register to journalize*

Employee Earnings Record used to track cumulative totals (wages and taxes)

Enter row of data each pay period Important because different wage caps for

FUTA, SUTA and OASDI taxes Need to track cumulative totals in order to

issue W-2s and do quarterly SUTA reports Prepare payroll analyses - various internal

and external reports

Next screens show how to enter information into accounting system

Gross payroll is debited Each withholding tax is a liability

Advanced EIC reduces FIT Payable All other payroll deductions are liabilities

as well

Any deduction that the ER makes from EE paycheck goes into a liability account (because they owe it to someone) such as: Group life insurance premiums Health insurance premiums Purchase government savings bonds Union dues Deferred compensation (contributions to

pension plan) Child support/other garnishments

A creditor can, through the courts, seek repayment of his/her money by garnishment Employer is required to comply with garnishment

order ER must withhold funds from EE’s paycheck

and submit it to appropriate authorities Child support (see next slide) Creditor garnishments limited depending upon

state Administrative wage and student loan

garnishments limited to 15% of disposable earnings

Family Support Act of 1988 requires immediate withholding for child- support payments ER can withhold a state mandated fee for

administration Some states now require electronic submission of

garnished child support payments

Maximum amount that can be withheld from a person’s weekly disposable earnings varies according to different support orders, but can be as high as 50-65% of disposable earnings

Pension plans that involve employee contributions result in liability for the employer

Recorded in payroll entry Pension Protection Act of 2006 gives

company ability to automatically enroll EEs in company’s plan and deduct contributions from pay

Cash/check Electronic payment methods

EFTS (Electronic funds transfer system) Distribute electronic pay stub

Pay Cards Cards that allow ER to deposit payroll into prepaid

card; card then utilized like debit or credit card As of 2006, 30 states allow their use

Final pay Many states set time limit between termination and

final wage pay out CA and MI require immediate payment if EE is fired

Journal Entry #1 - Record gross wages, withholdings and net pay

Journal Entry #2 - Record employer payroll tax expense

These two journal entries are always the same in format. You must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example).

Debit Wage Expense for gross payroll Credit each withholding account - they are all liabilities Credit cash (or wages payable) for net payroll

Gross OASDI HI FIT SIT Insurance Net

1000.00 62.00 14.50 83.00 21.00 103.00 716.50 845.00 52.39 12.25 91.00 29.00 88.00 572.36

1,845.00$ 114.39$ 26.75$ 174.00$ 50.00$ 191.00$ 1,288.86$

Journal entry #1Wage Expense 1845.00

OASDI Payable 114.39HI Payable 26.75FIT Payable 174.00SIT Payable 50.00Insurance Payable 191.00Cash 1,288.86

Debit Payroll Tax Expense for total of all payroll taxes that ER pays

Credit each account - they are all liabilities

Payroll for Period Ended 5/15/2008

0.8% 2.8% 6.2% 1.45%

EE Gross FUTA Wages SUTA Wages OASDI Wages HI Wages

A 1,000.00 - 800.00 1,000.00 1,000.00

B 845.00 215.00 845.00 845.00 845.00

Total 1,845.00$ 215.00$ 1,645.00$ 1,845.00$ 1,845.00$

Tax 1.72$ 46.06$ 114.39$ 26.75$

Calculate all employer taxes utilizing varying wage bases and percentagesJournal entry #2

Payroll Tax Expense 188.92FUTA Payable 1.72SUTA Payable 46.06OASDI Payable 114.39HI Payable 26.75

Look in general ledger, in each applicable liability account, for amount due

Deposit 941 taxesNote: Don’t forget to double

OASDI and HI

Deposit state income tax

Deposit SUTA

Cash 456.28

228.78

53.50

174.00HI PayableFIT Payable

OASDI Payable

SIT Payable Cash 50.00

50.00

SUTA Payable Cash 46.06

46.06

Workers’ compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities Laws differ by state Premiums are calculated based on employment

classification - per $100 of payroll Pay premiums in advance based on projected

wages Then, at year-end, report actual wages and pay

additional premium Or may receive credit towards next year

Per $100 of payrollEE Gross Position Work Comp. Rate Premium

A 1,000.00 Fabricator 9.08 90.80 B 845.00 Administrator 1.05 8.87 Total 1,845.00$ 99.67$

Payroll for Period Ended 5/15/08

Debit Work Comp. Insurance Expense for premium paid Credit Cash (if paying) or Insurance Payable (if accruing)

Journal entryWorkers’ Comp. Insurance Expense 99.67

Cash or Insurance Payable 99.67

Accrued wages should be recorded for wages earned by workers but not yet paid;

To record unpaid wagesWage Expense 1589.96

Wages Payable 1589.96

Accrued vacation pay should be recorded for amount of vacation pay owed employees Many ER’s now merging sick time and vacation time

Vacation Benefits Expense 520.00 Vacation Benefits Payable

520.00

Account Title Normal Balance Type of Account

FIT Payable Credit Liability

SIT Payable Credit Liability

Insurance Payable Credit Liability

Union Dues Payable Credit Liability

Wages Payable Credit Liability

Vacation Benefits Payable

Credit Liability

Account Title Normal Balance Type of Account

Wage Expense Debit Expense

Payroll Tax Expense Debit Expense

Workers’ Compensation Insurance Expense

Debit Expense

Vacation Expense Debit Expense

OASDI Payable Credit Liability

HI Payable Credit Liability

FUTA Payable Credit Liability

SUTA Payable Credit Liability