# Payroll Accounting Chapter 12.

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Payroll Accounting Chapter 12

Calculating Gross Earnings
Using a Payroll System Payroll is a list of the employees and the payments due to each employee for a specific pay period. Pay period is the amount of time over which an employee is paid. Weekly Biweekly Semimonthly Monthly A payroll system: Collects and processes all information needed to prepare and issue payroll checks Generates payroll records for accounting and reporting purposes Pg 310

Payroll Clerks Businesses with many employees often hire a payroll clerk. Their responsibilities usually include: Making sure employees are paid on time Making sure each employee is paid the correct amount Completing payroll records Submitting payroll reports Paying payroll taxes Pg 310

Computing Gross Pay Gross Earnings (pay) – the total amount of money earned by an employee for time spent working during a pay period. Accountants refer to this as Salary Expense Salary Hourly Wage Commission Salary plus commission or bonus Piece rate *Some employees are entitled to overtime pay Pg 311

Salary Salary – a fixed amount of money paid for a fixed amount of time regardless of the number of hours worked in that time period Many managers are paid salary and expected to get a certain amount of work done within a time period without concern for the amount of time it actually takes to complete it Ex: Paula earns \$2,000 a month. Some months she works 160 hours and some she works 170 hours but still is paid \$2,000 for the work that is expected. Pg 311

Hourly Wage Wage – an amount of money paid to an employee at a specified rate per hour worked. The hourly rate is multiplied by the hours worked to come up with a gross pay Hours are usually recorded in increments of quarters (every 15 minutes) and rounded to the nearest Ex. \$7.25 per hour * hours = \$99.69 gross pay Hours worked are usually recorded on a time card that keeps track of time in and time out of an employee. Electronic Badge Readers – The employee scans his/her badge and the computer records the time in and out. Pg 312

Other Methods of Pay Pg 314 Commission – an amount paid to an employee based on a percentage of the employee’s sales. Commission encourages employees to sell more because their compensation is in direct correlation to the amount they sell. Salary Plus Commission – an employee is paid a set amount and then can earn additional pay based on sales Piece Rate – manufacturing companies pay employees based on the number of items produced. Overtime Pay – an additional amount paid to hourly employees when they work more than the legal limit of standard pay. (1.5 x’s hourly rate for any hours over 40 per week.)

Payroll Deductions Deductions – an amount subtracted from gross earnings Federal Income Tax – a tax based on earnings Form W-4 – Filled out by the employee to help determine how much money will be deducted. Marital status Number of allowances (withholding allowance) Gross earnings Withholding Allowance – the more allowance you claim, the less you have deducted Tax Tables help you determine how much money should be deducted each pay period Pg 316

W-4 Form Pg 316

Federal Tax Withholdings Table

FICA Taxes FICA Taxes are a set percent of total earnings
Social Security Tax – provides funding to certain individuals The old and disabled Survivors of deceased workers Medicare Tax – finances health insurance benefits for people who are elderly or disabled. Ex. Social security tax 6.20% Medicare tax 1.45% Total FICA taxes 7.65%

State and Local Income Taxes
Most states have an income tax in addition to the federal income tax and FICA taxes. Some communities (cities) have an additional tax in addition to the federal income tax and FICA taxes.

Voluntary Deductions Employers will usually agree to withhold additional amounts from and employee’s check until otherwise notified not to. Union Dues Health insurance payments Life insurance payments Pension and other retirement contributions Credit union deposits and payments U.S. savings bonds and charitable contributions 401(k) plan – a popular voluntary payroll deduction that is a pre-tax retirement contribution.

Preparing the Payroll Register
Payroll Register – a form that summarizes information about employee’s earnings for each pay period. Identification information Employee’s I.D. number Name Marital status Number of allowances claimed Total Hours Rate of pay Earnings (regular, overtime, total) Deductions Net Pay – How much the is left after deductions have been subtracted from Gross Pay Check number Totals Pg 321

Payroll Register Pg 320

Paying Employees Payroll checks are issued to employees
If a small company then many times employees are paid from the general account If several employees, most companies will have a separate payroll bank account. The total amount of the payroll is transferred to the payroll account and then checks are issued using the money in that account Payroll checks have stubs attached showing the gross earnings, deductions and net pay Direct Deposit – If an employee has direct deposit, then they are give proof of the deposit and a list of deductions Pg 322

Payroll Stub Pg 322

The Employee’s Earnings Record
Employee’s Earnings Record is a file on each employee documenting his/her pay and deductions Accumulated Earnings is also listed on the employee’s earnings record. It is a running total of earnings for the year. Businesses usually keep these on a quarterly basis and then carry the totals forward to a new record. Pg 323

Employee’s Earnings Record
Pg 324

Managerial Implications for Payroll Accounting
Wages and salaries are a large part of a company’s expenses. They should be done with the utmost care The process should have internal controls to prevent errors Pg 324