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10-1 Skyline College Chapter 10. 10-2 An employee is a person who is hired by and works under the direction of the employer. Who Is an Employee? Works.

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Presentation on theme: "10-1 Skyline College Chapter 10. 10-2 An employee is a person who is hired by and works under the direction of the employer. Who Is an Employee? Works."— Presentation transcript:

1 10-1 Skyline College Chapter 10

2 10-2 An employee is a person who is hired by and works under the direction of the employer. Who Is an Employee? Works under the control of the employer Uses equipment provided by the employer Works hours that are set by the employer

3 10-3 An independent contractor is one who is paid by a company to carry out a specific task or job but is not under the direct supervision or control of the company. Does not work under the direct supervision or control of the company Furnishes his or her own tools or equipment Sets his or her own working hours No withholding for independent contractors No payroll tax for independent contractors

4 10-4 How do employees differ from independent contractors? EmployeeIndependent Contractor Works under the control and direction of the employer Does not work under the direct supervision or control of the company Uses tools or equipment provided by the employer Works certain hours that are set by the employer Sets his or her own working hours Furnishes his or her own tools or equipment

5 10-5 Also referred to as the Wage and Hour Law Applies only to firms engaged directly or indirectly in interstate commerce Sets a minimum hourly rate of pay and maximum hours of work per week to be performed at the regular rate of pay Employees who work beyond 40 hours a week are entitled to “time and a half.” The Fair Labor Standards Act of 1938

6 10-6 Time and a half is the rate of pay for an employee’s work in excess of 40 hours a week. It is one and one-half times the regular hourly rate of pay. Time and a half

7 10-7 Social security tax is a tax imposed by the Federal Insurance Contributions Act (FICA) and collected on employee earnings to provide retirement and disability benefits. Social Security Tax

8 10-8 Social Security Tax The rate (6.2 percent) has remained constant in recent years. The earnings base has increased each year. The amount of social security tax is determined by: As of 2005  rate  earnings up to a calendar year earnings base  $90,000  6.2%

9 10-9 Medicare tax is a tax on employees and employers to provide medical care for the employee and the employee’s spouse after each has reached age 65. Medicare Tax

10 10-10 Medicare Tax The rate (1.45%) has remained constant in recent years. The Medicare tax does not have an earnings base limit. The amount of Medicare tax is determined by: As of 2005  rate  earnings  total earnings  1.45%

11 10-11 Medicare tax (1.45%)social security tax (6.2% up to an earnings base limit) Employee Earnings Gross Wages

12 FICA Tax Employee (withheld) 6.2% X $90,000 = $5, Medicare Tax Employee (withheld) 1.45% X $100,000 = $1, Let’s assume an employee earns $100,000 in the calendar year.

13 Social Security Tax and Medicare Tax Tax payable Employee 1 $50,000 Employee 2 $90,000 Employee 3 $100,000 $3, $5, Social Security Tax Medicare Tax $50,000 X 6.2% = $3, $90,000 X 6.2% = $5, Earnings 

14 Social Security Tax and Medicare Tax Tax payable Social Security Tax Medicare Tax $50,000 X 1.45% = $ $100,000 X 1.45% = $1, $90,000 X 1.45% = $1, $ $1, $1, $3, $5, Employee 1 $50,000 Employee 2 $90,000 Employee 3 $100,000 Earnings 

15 10-15 Federal Income Tax Employers are required to withhold an estimated amount of federal income tax from the employee’s earnings.

16 10-16 social security tax (6.2% up to an earnings base limit) Employee Earnings Medicare tax (1.45%)federal income tax Gross Wages

17 10-17 State and Local Taxes Most states, and many local governments, may require employers to withhold income taxes from employees’ earnings to prepay the employees’ state and local income taxes. The rules are generally almost identical to those governing federal income tax withholding.

18 10-18 Employer’s Payroll Taxes and Insurance Costs Employers withhold social security and Medicare taxes from employees’ earnings. In addition, employers pay social security and Medicare taxes on their employees’ earnings. Employers are also required to pay: Federal unemployment tax State unemployment tax Workers’ compensation insurance

19 10-19 social security tax (6.2% up to an earnings base limit) Employee Earnings Medicare tax (1.45%)federal income tax The employer matches the social security tax withheld from the employee’s earnings.

20 10-20 social security tax (6.2% up to an earnings base limit) Employee Earnings federal income tax The employer matches the Medicare tax withheld from the employee’s earnings. Medicare tax (1.45%)

21 FICA Tax Employee (withheld) 6.2% X $90,000 = $5, Employer 6.2% X $90,000 = $5, Total 12.4 % Let’s assume an employee earns $100,000 in the calendar year.

22 10-22 Federal unemployment taxes (FUTA) are taxes levied by the federal government against employers to benefit unemployed workers. Federal Unemployment Tax FUTA

23 10-23 State unemployment taxes (SUTA) are taxes levied by the state government against employers to benefit unemployed workers. State Unemployment Tax SUTA

24 10-24 Unemployment Rate Taxes The FUTA and SUTA tax rates are applied to FUTA wages: The federal tax rate is 6.2 percent. This can be reduced by the state tax rate (5.4 percent for many states). This text assumes that the taxable earnings base per employee is $7000 per year.

25 10-25 FUTA tax rate 6.2% (Less) SUTA tax rate (5.0) Net FUTA tax rate 1.2 Total taxes 6.2% 6.2% (4.8) % SUTA tax rate 5.0%4.8%5.4% 6.2% (5.4) % The SUTA-FUTA Connection

26 10-26 social security tax (6.2% up to an earnings base limit) Employee Earnings federal income taxMedicare tax (1.45%)unemployment taxes (6.2% up to a taxable earnings base) Gross Wages

27 10-27 Workers’ compensation insurance is the insurance that protects employees against losses from job-related injuries or illnesses, or compensates their families if death occurs in the course of employment. Workers’ Compensation Insurance

28 10-28 Employee Records Required by Law Federal laws require that certain payroll records be maintained. For each employee the employer must keep a record of: Employee’s name, address, social security number, and date of birth Hours worked each day and week, and wages paid at the regular and overtime rates (certain exceptions exist for employees who earn salaries) Cumulative wages paid during the year Amount of income tax, social security tax, and Medicare tax withheld for each pay period Proof that the employee is a United States citizen or has a valid work permit

29 10-29 Kent Furniture and Novelty Co. imports furniture and novelty items to sell over the Internet. The firm is a sole proprietorship owned and managed by Sarah Kent. Kent Furniture and Novelty Co. has five employees. Payday is each Monday. Meet Kent Furniture and Novelty Co.

30 10-30 The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings. Hourly rate basis Salary basis Commission basis Piece-rate basis Computing Total Earnings of Employees

31 10-31 Hourly rate basis is a method of paying employees according to a stated rate per hour. Commission basis is a method of paying employees according to a percentage of net sales.

32 10-32 Piece-rate basis is a method of paying employees according to the number of units produced. Salary basis is a method of paying employees according to an agreed- upon amount for each week, month or other period.

33 10-33 Determining Pay for Hourly Employees Two pieces of data are needed to compute gross pay for hourly rate basis employees:  number of hours worked during the payroll period  rate of pay

34 10-34 Hours Worked Many businesses use time clocks for hourly employees. Each employee has a time card and inserts it in the time clock to record the times of arrival and departure. The payroll clerk collects the cards at the end of the week.

35 10-35 Computing Gross Pay Alicia Martinez40 hours X$ =$ Jorge Rodriguez 40 hours X$ 9.50 =$ George Dunlap40 hours X$ 9.00 =$ The gross pay for hourly employees for the week ended January 6 is determined as follows: Total hoursRate of payGross pay

36 10-36 George Dunlap earns $9.00 per hour. He worked 45 hours. He is paid 40 hours regular rate of pay and 5 hours at time and a half. Therefore, Dunlap’s gross pay adds up to: Overtime Regular earnings: 40 hours X $ 9.00 $ = = Overtime earnings: 5 hours X $13.50 $ Gross Pay $427.50

37 10-37 Withholdings for Hourly Employees Required by Law FICA (social security) tax Medicare tax Federal income tax withholding Recall that federal law requires employers to make three deductions from employees’ gross pay:

38 10-38 Earnings in excess of the base amount ($90,000 as of 2005) are not subject to FICA withholding. If an employee works for more than one employer during the year, the FICA tax is deducted and matched by each employer. When the employee files a federal income tax return, any excess FICA tax withheld from the employee’s earnings is refunded by the government or is applied to payment of the employee’s federal income taxes. Tax-exempt Wages

39 10-39 To determine the amount of social security tax to withhold, multiply the taxable wages by the social security tax rate and round off to the nearest cent. Social Security Tax Cindy Taylor $ X 6.2% =$24.80 Jorge Rodriguez X 6.2% = George Dunlap X 6.2% = Cecilia Wu X 6.2% = EmployeeGross payTax rate Tax Total social security tax $109.59

40 10-40 To compute the Medicare tax to withhold from the employee’s paycheck, multiply the wages by the Medicare tax rate, 1.45 percent. Medicare Tax Alicia Martinez $ X 1.45% = $ 5.80 Jorge Rodriguez X 1.45% = $ 5.51 George Dunlap X 1.45% = $ 6.19 Cecilia Wu X 1.45% = $ 8.12 EmployeeGross payTax rate Tax Total Medicare tax $25.62

41 10-41 The amount of federal income tax to withhold from an employee’s earnings depends on: Earnings during the pay period Length of the pay period Employee’s instructions: Marital status Number of withholding allowances

42 10-42 The taxpayer A spouse who does not also claim an allowance Each dependent for whom the taxpayer provides more than half the support during the year Withholding Allowances As the number of withholding allowances increases, the amount of federal income tax withheld decreases. In the simplest circumstances, a taxpayer claims a withholding allowance for:

43 10-43 The Employee’s Withholding Allowance Certificate, Form W-4 is a form used to claim exemption (withholding) allowances. The wage-bracket table method is a simple method to determine the amount of federal income tax to be withheld using tables provided by the government.

44 10-44 The wage-bracket table method is the most common way to compute the federal income tax withholding. The wage-bracket tables are in Publication 15, Circular E or online on Computing Federal Income Tax Withholding

45 10-45 Use the following steps to determine the amount to withhold: Wage-Bracket Table Method 1.Choose the table for the pay period and the employee’s marital status. 2.Find the row in the table that matches the wages earned. Find the column that matches the number of withholding allowances claimed on Form W-4. The income tax to withhold is the intersection of the row and the column.

46 Find the line covering wages between $560 and $570. Cecilia Wu is married, claims two withholding allowances, and earned $560 for the week. 1.Go to the table for married persons paid weekly. The tax to withhold is $30; this is where the row and column intersect. Find the column for two withholding allowances.

47 10-47 Other Deductions Required by Law Most states and some local governments require employers to withhold state and local income taxes from earnings. In some states employers are also required to withhold unemployment tax or disability tax. The procedures are similar to those for federal income tax withholding. Apply the tax rate to the earnings, or use withholding tables.

48 10-48 Some examples are: Group life insurance Group medical insurance Company retirement plans Bank or credit union savings plans or loan repayments United States savings bonds purchase plans Stocks and other investment purchase plans Employer loan repayments Union dues There are many payroll deductions not required by law but made by agreement between the employee and the employer.

49 10-49 A salaried employee earns a specific sum of money for each payroll period. Determining Pay for Salaried Employees Exempt employees are salaried employees who hold supervisory or managerial positions who are not subject to the maximum hour and overtime pay provisions of the Wage and Hour Law.

50 10-50 The procedures for withholding taxes for salaried employees is the same as withholding for hourly employees. Apply the tax rate to the earnings or use withholding tables. Withholdings for Salaried Employees Required by Law

51 10-51 A payroll register is a record of payroll information for each employee for the pay period. Recording Payroll Information for Employees

52 10-52 Completing the Payroll Register Enter the employee’s name (Column A), number of withholding allowances and marital status (Column B), and rate of pay (Column E). PAYROLL REGISTER WEEK BEGINNING January 1, 20-- NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW. STATUS EARNINGS HRS. Martinez, Alicia 1 M Rodriguez, Jorge 1 S Dunlap, George 3 S Wu, Cecil 2 M Booker, Cynthia 1 S (A) (B) (C) (D) (E)

53 10-53 Completing the Payroll Register PAYROLL REGISTER WEEK BEGINNING January 1, 20-- NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW. STATUS EARNINGS HRS. Martinez, Alicia 1 M Rodriguez, Jorge 1 S Dunlap, George 3 S Wu, Cecil 2 M Booker, Cynthia 1 S (A) (B) (C) (D) (E) The Cumulative Earnings column (Column C) shows the total earnings for the calendar year before the current pay period. Since this is the first payroll period for the year, there are no cumulative earnings prior to the current pay period.

54 10-54 Completing the Payroll Register PAYROLL REGISTER WEEK BEGINNING January 1, 20-- NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW. STATUS EARNINGS HRS. Martinez, Alicia 1 M Rodriguez, Jorge 1 S Dunlap, George 3 S Wu, Cecil 2 M Booker, Cynthia 1 S (A) (B) (C) (D) (E) In Column D enter the total number of hours worked in the current period. This data comes from the weekly time sheets. Note that all employees were paid for eight hours on January 1, a holiday.

55 10-55 Completing the Payroll Register Using the hours worked and the pay rate, calculate regular pay (Column F), the overtime pay (Column G), and gross pay (Column H). PAYROLL REGISTER WEEK BEGINNING January 1, 20-- EARNINGS NAME REGULAR OVERTIME GROSS CUMULATIVE AMOUNT EARNINGS Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , , , (A) (F) (G) (H) (I)

56 10-56 Completing the Payroll Register Calculate the cumulative earnings after this pay period (Column I). PAYROLL REGISTER WEEK BEGINNING January 1, 20-- EARNINGS NAME REGULAR OVERTIME GROSS CUMULATIVE AMOUNT EARNINGS Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , , , (A) (F) (G) (H) (I)

57 10-57 Completing the Payroll Register The Taxable Wages columns shows the earnings subject to taxes for social security (Column J), Medicare (Column K), and FUTA (Column L). Only the earnings at or under the earnings limit are included in these columns. AND ENDING January 6, 20-- PAID January 8, 20-- TAXABLE WAGES DEDUCTIONS NAME SOCIAL MEDICARE FUTA SOCIAL MEDICARE SECURITY SECURITY Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , , , (A) (J) (K) (L) (M) (N)

58 10-58 Completing the Payroll Register The Deductions columns show the withholding for social security tax (Column M), Medicare tax (Column N), federal income tax (Column O), and medical insurance (Column P). AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS NAME SOCIAL MEDICARE INCOME HEALTH SECURITY TAX INSURANCE Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia (A) (M) (N) (O) (P)

59 10-59 Completing the Payroll Register Subtract the deductions (Columns M, N, O, and P) from the gross earnings (Column H). Enter the results in the Net Amount column (Column Q). This is the amount paid to each employee. AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO. SALARIES WAGES Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , , (A) (O) (P) (Q) (R) (S) (T)

60 10-60 Completing the Payroll Register AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO. SALARIES WAGES Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , , (A) (O) (P) (Q) (R) (S) (T) Enter the check number in Column R.

61 10-61 Completing the Payroll Register AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO. SALARIES WAGES Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , , (A) (O) (P) (Q) (R) (S) (T) The payroll register’s last two columns classify employee earnings as office salaries (Column S) or shipping wages (Column T).

62 10-62 The Payroll Register When the payroll data for all employees has been entered in the payroll register, total the columns.

63 10-63 Recording Payroll 1. Record the payroll expense 2. Pay the employees Recording payroll information involves two separate entries:

64 GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Jan. 8 Shipping Wages Expense 1, Social Security Tax Payable Medicare Tax Payable Payroll for week ending Jan. 6 Office Salaries Expense Employee Income Tax Payable Health Insurance Premiums Payable Salaries and Wages Payable 1, AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO. SALARIES WAGES Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , , (A) (O) (P) (Q) (R) (S) (T) The information in the register is used for recording the payroll expense.

65 GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Jan. 8 Shipping Wages Expense 1, Social Security Tax Payable Medicare Tax Payable Payroll for week ending Jan. 6 Office Salaries Expense Employee Income Tax Payable Health Insurance Premiums Payable Salaries and Wages Payable 1, Each type of deduction is credited to a separate liability account. AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS NAME SOCIAL MEDICARE INCOME HEALTH SECURITY TAX INSURANCE Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia (A) (M) (N) (O) (P) A separate liability account is set up for each deduction.

66 GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF Jan. 8 Shipping Wages Expense 1, Social Security Tax Payable Medicare Tax Payable Payroll for week ending Jan. 6 Office Salaries Expense Employee Income Tax Payable Health Insurance Premiums Payable Salaries and Wages Payable 1, AND ENDING January 6, 20-- PAID January 8, 20-- DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO. SALARIES WAGES Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , , (A) (O) (P) (Q) (R) (S) (T) Net pay is credited to the liability account, Salaries and Wages Payable.

67 10-67 Paying Employees Most businesses pay their employees by check or by direct deposit. By using these methods, the business avoids the inconvenience and risk involved in dealing with currency.

68 10-68 GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. DEBIT CREDIT REF. Jan. 8 Salaries and Wages Payable 1, Cash 1, To record payment of salaries and wages for week ended Jan. 6 On January 8 Kent Furniture and Novelty Co. wrote five checks for payroll, Check numbers Wages Paid General Journal Format


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