c hapter 5 p ayroll a ccounting accounting and finance for entrepreneurs ebd -301 all rights...

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CHAPTER 5PAYROLL ACCOUNTING

Accounting and Finance for Entrepreneurs

EBD -301

Dr. David P Echevarria


PAYROLL ACCOUNTING

If you have employees – you have payroll responsibilitiesIRS regulations are quite specific when it comes to payroll taxes and their timely remissionThe need to maintain absolutely accurate records is essential



PAYROLL ACCOUNTING

Bookkeeping RequirementsJournal Accounts

Wage and Salary Expense (when paid)Accrued Wages and Salaries Payable (when owed but not yet paid)Payroll taxes Payable (when taxes have not been remitted)Income Taxes Payable (Federal, State, Local)



PAYROLL ACCOUNTING

Payroll withholdingsEmployee portion of Social Security taxEmployee portion of Medicare taxFederal income taxState income taxCourt-ordered withholdingsOther withholdings



Payroll Cost Accounts

Salaries and Wages Regular pay, Commissions, Overtime pay

Payroll Taxes Social Security, Medicare, Federal Income

Taxes, State Income Taxes, City Income

Taxes,

Payroll Costs Federal Unemployment Taxes, State

Unemployment Tax, Workman’s

Compensation Insurance

Employee Benefits Holiday pay, vacation pay, paid sick days,

Insurance (Health, Dental, Disability, [Term]

Life), Retirement Plans, Profit Sharing,



Mandated Taxes on Income

Social Security FICA Tax (employer match)2014: 6.2% of first $117,000

Medicare Tax (employer match)2014: 1.45% on all income

Plus 0.9% surtax on certain incomes)

Federal Income Tax (importance of W-4 form)

Rate of taxation a function of status

State and Local TaxesTypically a flat rate



Other Withholdings

Court Ordered JudgmentsGarnishment of wages to pay fines, etc.

Miscellaneous WithholdingsUnion duesInsurance premiumsRetirement fund contributionsCharitable contributions



Employer Payroll Related Expense

Employer portion of Social Security taxEmployer portion of Medicare taxState unemployment taxFederal unemployment taxWorker compensation insuranceEmployer portion of insurance (health, dental, vision, life, disability)Employer paid holidays, vacations, and sick daysEmployer contributions toward 401(k), savings plans, & profit-sharing plansPost-retirement health insurance



State Unemployment Tax

100% of Federal and State Unemployment taxes are paid by employersRates and amounts are based on amounts earned by each employee and historic experience



WORKER COMPENSATION INSURANCE

Worker compensation insurance provides coverage for employees who are injured on the job. State law usually requires that employers carry this insurance. Worker compensation insurance rates are a function of at least three variables:

(1) the type of business or industry, (2) the type of job being performed, and (3) the employer's history of claims.



Employer Portion of Benefits

InsuranceTerm LifeHealthDentalVisionDisability

Vacation and Holiday Pay, Sick Days10 Federal HolidaysAmounts due based on length of service



Contributions to Retirement Plans

Defined Benefit PlansTypically Insurance annuities fully funded by employer

Defined Contribution Plans 401(k), 403(b)

Employer and Employee both contributeEmployer typically matches some portion of employee’s contribution



Sample Journal EntriesDate Account Name Debit Credit

Dec. 24 Wages Expense: Delivery Dept 1,000.00

Wages Expense: Warehouse Dept 1,300.00

FICA Tax Payable *

175.95

Federal Inc Tax Withholdings Payable

300.00

State Inc Tax Withholdings Payable

110.00

401(k) Payable

70.00

Health Ins. Expense: Delivery

90.00

Health Ins. Expense: Warehouse

80.00

United Way Payable

30.00

Garnishment Payable

50.00

Net Payroll Payable

1,394.05

* $2,300 x 7.65%



Sample Journal EntriesDate Account Name Debit Credit

Dec. 24 FICA Expense: Delivery * 76.50

FICA Expense: Warehouse 99.45

Unemployment Tax Expense: Warehouse 4.00

Worker Compensation Insurance Expense 46.00

Holiday, Vac., Sick Days Expense: Delivery

100.00

Holiday, Vac., Sick Days Expense: Warehouse

130.00

401(k) Expense: Delivery 10.00

401(k) Expense: Warehouse 25.00

FICA Tax Payable

175.95

Unemployment Tax Payable

4.00

Worker Comp Insurance Payable

46.00

Holiday, Vacation, Sick Days Payable

230.00

401(k) Payable

35.00

* $1,000 x 7.65%



Sample Journal Entries

Date Account Name Debit Credit

Dec. 29 Net Payroll Payable 1,394.05

Cash

1,394.05

Date Account Name Debit Credit

Dec. 29 FICA Tax Payable * 351.90

Federal Inc Tax Withholdings Payable 300.00

State Inc Tax Withholdings Payable 110.00

401(k) Payable 105.00

Cash

866.90

* $175.95 from Entry #1 + $175.95 from Entry #2



Self-employed Person’s FICA Tax Rate for 2013

The self-employed person’s FICA tax rate for 2014 is 15.3% on the first $117,000 of net income and then 2.9% on the net income that is in excess of $117,000.

Social Security: 12.4% of first $113,700Medicare Tax: 2.90% of every dollar of income

0.9% surtax on income above $200,000 (single) or $250,000 (joint)


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