CHAPTER 6 CHAPTER 6 ANALYZING & JOURNALIZINGANALYZING & JOURNALIZING

PAYROLL TRANSACTIONSPAYROLL TRANSACTIONS

Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland

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

Learning Objectives

• Record payrolls in appropriate records• Understand various deductions taken from

employees’ gross pay• Journalize entries to record payroll and payroll

taxes• Post to general ledger• Explain recording of payroll tax deposits• Understand need for end-of-period

adjustments

Accounting for Payroll Transactions

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

LO-1

Payroll Register

First – record info in 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*LO-1

Employees’ Earnings RecordsSecond – transfer info to employees’ earnings

records

• Used to track cumulative totals (wages and taxes)

• Enter row of data for 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

• Used to prepare payroll analyses - various internal and external reports

• Might be used to settle employee grievances LO-1

Recording Gross Payroll & Withholdings

Third - enter information into accounting system

• Gross payroll is debited• Each withholding tax is credited to a

liability• All other payroll deductions are

liabilities as well

LO-1

Recording Gross Payroll & Withholdings

• Any deduction that the employer makes from employee’s paycheck goes into a liability account (because they owe it to someone) such as:• Group life insurance premiums• Health insurance premiums• Purchase of government savings bonds• Union dues• Wage garnishments• Pension and retirement contributions

LO-2

Garnishments• A creditor can, through the courts, seek repayment

of his/her money by garnishment• Employer is required to comply with garnishment order

• Employer must withhold funds from employee’s paycheck and submit it to appropriate authorities• Garnishments limited based upon Consumer Credit

Protection Act (CCPA) - other than for federal tax levies • Priority for attachments are: (1) bankruptcy* (2)

federal tax levy/child support (3) creditor, student loan, federal administrative wage garnishments

*Chapter13 bankruptcy orders have highest priority over all other claims

LO-2

Child Support

• Family Support Act requires immediate withholding for child-support payments • Employer 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 vary between 50-65% of disposable earnings depending on other obligations and number of weeks in arrears LO-2

Federal Tax Levy

• Take second priority after wages withheld for child support (if received prior to tax levy)

• These levies are suspended if debtor declares bankruptcy

• Amount of taxpayer’s standard deduction is only amount that is exempt from a federal tax levy• $5,950 for single and $11,900 for married

• IRS publishes tables that can be used to figure amount exempt from tax levies

• Employer required to withhold until Form 668-D (Release of Levy/Release of Property from Levy) received

LO-2

Pension & Retirement Contributions

• 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 employees in company’s plan and deduct contributions from pay

LO-2

Methods of Paying Wages & Salaries• Check

• Sometimes separate payroll account maintained to make bank reconciliation process easier

• Electronic payment methods• EFTS (electronic funds transfer system)

• Electronic records created showing bank, account # and net pay

• Pay cards allow employer to deposit payroll into prepaid card

• Card utilized like debit or credit card• Many employees who do not have bank accounts use these

• Electronic paystubs alleviate need for paper paystubs

• Final pay• Many states set time limit between termination and final

wage pay out (depends upon whether worker left voluntarily)

• CA and MI require immediate payment if employee is firedLO-3

Journal Entries to Record Payroll

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

• Journal Entry #2 - Record employer’s 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).

LO-3

Journal Entry #1

• 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 Net1,000.00 42.00 14.50 83.00 21.00 103.00 736.50

845.00 35.49 12.25 91.00 29.00 88.00 589.26 1,845.00$ 77.49$ 26.75$ 174.00$ 50.00$ 191.00$ 1,325.76$

Journal entry #1Wage Expense 1,845.00

FICA Taxes Payable - OASDI 77.49

FICA Taxes Payable - HI 26.75

Employees FIT Payable 174.00

SIT Payable 50.00

Group Insurance Payments W/H 191.00

Cash

1,325.76

LO-3

Journal Entry #2• Debit Payroll Tax Expense for total of all payroll taxes that

employer pays • Credit each account - they are all liabilitiesEE Gross FUTA Wages SUTA Wages OASDI Wages HI Wages

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

B 845.00 615.00 845.00 845.00 845.00

Total 1,845.00$ 615.00$ 1,645.00$ 1,845.00$ 1,845.00$

Tax 3.69$ 46.06$ 114.39$ 26.75$

Calculate all employer taxes utilizing varying wage bases and percentages

Journal entry #2

Payroll Tax Expense 190.89FUTA Taxes Payable 3.69SUTA Taxes Payable 46.06FICA Taxes Payable - OASDI 114.39FICA Taxes Payable - HI 26.75 LO-3

Recording Deposit of Payroll Taxes

Look in general ledger for amounts due

• Deposit 941 taxes

• Deposit SIT

• Deposit SUTA

191.8853.50

174.00 Cash 419.38

FICA Taxes Payable - HIEmployee FIT Payable

FICA Taxes Payable - OASDI

SUTA Taxes Payable Cash

46.0646.06

SIT Payable Cash

50.0050.00

LO-5

Workers’ Compensation Insurance

• 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 often calculated based on

employment classification – stated in terms of $100 per 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

LO-5

Journal Entry for Workers’ Compensation

EE Gross Work Grade Rate per $100 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 5/15/13

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

Journal entry

Workers’ Comp. Insurance Expense 99.67Cash or Workers’ Comp. Insurance Payable 99.67

LO-5

Journalize Period-End Accruals

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

Journal entryWage Expense 1,589.96

Wages Payable 1,589.96

• Accrued vacation pay should be recorded for amount of vacation pay owed employees - many employers now merging sick time and vacation time

Journal entryVacation Benefits Expense 520.00 Vacation Benefits Payable 520.00

Note: Not necessary to accrue payroll tax expense at year-end LO-6