Ch.11 Accounting for Payroll: Employee Earnings and Deductions

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o Employees gross earnings

o Payroll deductions and net pay

o Payroll register

oAccounting entries for employee earnings and deductions and for payment of the payroll

Why Keep Up-to-Date Payroll Records

To accumulate the information needed to calculate the pay of

each employee for each payroll period

To provide information needed to complete the various payroll

reports that are required by federal and state regulations

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Employer/Employee Relationships The distinction between employees and independent contractors

is important:

Employees

Under the direct control of an employer on a continuing basis

Payroll accounting applies

Independent Contractor

Agrees to perform and complete a specific job or task and is

left to determine the ways and methods of achieving that job

or task

Personally responsible for paying their own taxes

How Employees Are Paid

Salaried Employee — an individual who works for a

fixed amount of pay for a definite period of time,

such as a week, a month, or a year

Salary — a fixed amount paid to employees for a

certain period of time, such as a week, month, or

year

Hourly Worker — an individual who works for a fixed

hourly rate, usually referred to as a wage

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Fair Labor Standards Act

• Establishes standards for

Minimum wage

Overtime pay

Child labor

Required payroll record keeping

Equal pay for equal work regardless of sex

• Administered by the Wage and Hour Division of the

US Department of Labor

• Applies only to firms engaged in interstate commerce

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Fair Labor Standards Act

• Employees covered by the Act are guaranteed a

minimum wage and overtime pay if they work more

than 40 hours in one week

• Minimum Wage — the lowest hourly rate that can be

paid to employees covered by the Act

• Overtime Pay — a minimum of one and one-half

times the regular rate of pay for all hours worked

over 40 during a week

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• Assume William Heedy earns $17 per hour and worked 48 hours during the current week.

• His employer is required to pay time-and-a-half for all hours over 40 per week.

• William’s gross pay for the week would equal:

40 regular hours X $17 = $680

8 overtime hours X $25.50 ($17 x 1.5) = 204

Gross pay $884

A Typical Example – Hourly Paid

Piece-Rate Plans

• Usually factory workers

• Pays a certain rate for each unit worker completes

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Assume a factory worker is paid $.06 for each unit

produced. The employee processed 4,800 units in a

given week. The employee’s earnings for that week

are calculated as follows:

Number of units produced X Rate per unit = Earnings for the period

4,800 X $.06 = $288.00

Gross Earnings

• An employee’s earnings before any amount are deducted by the employer.

• The employee is usually hired for an annual salary; the annual salary is then divided by the number of pay periods in the year.

• The most common pay periods are weekly, biweekly, semimonthly, and monthly.

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Assuming an employee is hired at an annual salary of $28,080, the gross pay per pay period would be:

Type of Pay Period

Number of Pay Periods in a Year Gross Earnings per Pay Period

Weekly 52 $28,080 ÷ 52 = $540

Biweekly 26

Semimonthly 24

Monthly 12

$28,080 ÷ 26 = $1,080

$28,080 ÷ 24 = $1,170

$28,080 ÷ 12 = $2,340

Payroll Deduction

• An amount withheld from the pay of an employee

• May be mandatory or voluntary

• Mandatory deductions include

• Social Security taxes

• Federal income taxes

• Certain taxes for state and local agencies

• Voluntary deductions include

• Amount for insurance premiums

• Charities

• Retirement plans

• Union dues

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FICA Tax (Social Security)

• The Federal Insurance Contributions Act (FICA) is used to finance • Old-Age, survivors, and Disability Insurance (OASDI) • Hospital Insurance (HI) plan, or Medicare

• Both the employee and the employer contribute equal amounts to the tax.

• We will concentrate in this chapter on the employee’s share of the tax.

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The OASDI Taxable Wage Base • The maximum amount of earnings during a calendar year that is

subject to OASDI taxes presently is $113,700 and OASDI tax rate is 6.2%

The HI Taxable Wage Base • No maximum wage base for HI taxes; all earnings are subject to

HI regardless of the amount; HI tax rate = 1.45%

Federal Income Tax

The federal government’s main source of revenue is

the income tax imposed on personal incomes.

Unless specifically exempted, all income (legal and

illegal) is subject to personal income tax.

The amount of personal income tax to be withheld

depends on three factors:

The employee’s gross earnings

The employee’s marital status

The number of withholding allowances claimed by

the employee

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At the start of a new job, or when personal information

changes, an employee is required to complete a W-4 form,

which is kept on file by the employer.

Employee’s Withholding Allowance Certificate (Form W-4)

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State and Local Income Taxes and Other Deductions

Most state governments require an employer to withhold

an income tax from earnings of employees.

The state income tax is based on an employee’s marital

status, the amount of earnings, and the number of

withholding allowances claimed.

Other deductions include amounts

Donated to charities

For health and life insurance or union dues

Invested in US savings bonds or retirement plans

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Calculating Net Earnings (Take-Home Pay)

• Assume Sam Morgan has gross earnings of $360 with

the following deductions:

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OASDI $22.32

HI 5.22

Federal income taxes 8.00

State income taxes 5.00

Medical insurance deduction 15.00

Savings bonds deduction 10.00

Union dues deduction 5.00

Total deductions $70.54

• Net earnings is the amount of earnings after all payroll

deductions have been made; it is the actual amount of

the employee’s paycheck, or take-home pay.

• Sam’s net pay is equal to his gross pay less all his deductions:

• $360 – $70.54 = $289.46

How Net Pay is Determined

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Payroll Record Keeping

• To provide management with up-to-date payroll

information and to comply with various federal, state,

and local laws, an employer must maintain payroll

records that will supply the following information for

each employee:

o Name, address, and Social Security number

o The amount of gross earnings for each payroll

o The period of employment covered by each payroll

o The year-to-date gross earnings

o The amount of taxes and other deductions

o The date each payroll was paid

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The Payroll Register

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The Status column shows the employee’s marital status

and the number of withholding allowances being claimed

by the employee.

A summary of the gross earnings, deductions, and net pay for

all employees for a specific payroll period.

The Payroll Register

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The Payroll Register

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Two Types of Payroll Systems

• Manual system

• The payroll register is prepared first, and the

information is transferred to the employee’s

earnings record.

• A totally manual payroll system is rare today.

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• Computerized system

• Increase processing speed and accuracy

• Generate payroll reports automatically

• Can save the payroll personnel hours of tedious,

repetitive payroll calculations

Payroll Register

• Provides all the information necessary to record the

payroll

• Can use as a special journal and post the column totals

directly to the ledger

• Can use as an information source for recording the

payroll in either the general journal or the cash

payments journal

• In recording employee earnings and the deductions

from earnings, separate accounts should be

maintained for the earnings and for each deduction

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The Salaries Expense Account

• An operating expense account used to record the

gross amount of the payroll

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Expense accounts are

always debited to show

an increase.

The FICA Tax Payable—OASDI Account

• A liability account used to record the amount of OASDI

tax withheld from the earnings of employees and is also

used to record the liability for the employer’s share of

OASDI taxes

• Credited when OASDI taxes are withheld

• Debited when OASDI taxes are sent in

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Liability accounts are

always credited to show

an increase and debited

to show a decrease.

The FICA Tax Payable—HI Account

• A liability account used to record

The amount of HI (Medicare) tax withheld from the

earnings of employees

The liability for the employer’s share of HI taxes

• Credited when HI taxes are withheld

• Debited when HI taxes are sent in

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The Federal Income Tax Payable Account

• A liability account used to record the amount of federal

income taxes withheld from the earnings of employees

• Credited when income taxes are withheld

• Debited when the taxes are sent in

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Other Amounts Withheld

• Recorded in an appropriate liability account

• State income tax withheld — in the State Income Tax

Payable account

• Union dues withheld — in the Union Dues Payable

account

• These accounts, and similar liability accounts

Credited when amounts are withheld

Debited when payment is made to the

appropriate agency

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The net amount of the payroll is recorded in the Salaries Payable account. The

Cash account would be credited if payment were made immediately. However,

recording the net amount in the Salaries Payable account allows the payroll to be

recorded before the paychecks are prepared.

Journal Entry for Employee Earnings and Deductions

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1 20X3

Nov. Sales Salaries Expense 205500 1

2 Office Salaries Expense

5500

2

FICA Tax Payable - OASDI

FICA Tax Payable - HI

Federal Income Tax Payable

State Income Tax Payable

Medical Insurance Payable

Savings Bonds Payable

Union Dues Payable

5023

13944

140900

34100

13212

6900

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4

5

6

7

8

9

3

4

5

6

7

8

9

10

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Salaries Payable

Recorded payroll of November 18.

1500

266221 10

11

18

Making Payment to Employees

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- liability - asset

Steps in Recording the Payroll

1. Record the payroll information in the payroll register.

2. Use the payroll register as an information source to

record a journal entry for employee earnings and

deductions.

3. Record a journal entry for payment of the payroll.