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Employee Earnings and Deductions
Chapter Eight Employee Earnings and Deductions
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Performance Objectives
Understand the role of laws that affect payroll deductions and contributions Calculate total earnings based on an hourly, piece-rate, or commission basis Determine deductions using tables of employees’ income tax withholding Accounting Is Fun!
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Performance Objectives
Complete a payroll register Journalize the payroll entry from a payroll register Maintain employees’ individual earnings records Accounting Is Fun!
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Employer Requirements
To withhold federal and state taxes from employees’ paychecks To pay the withholdings (as well as other payments) to government agencies before specific deadlines To submit federal and state reports on official forms This makes payroll accounting very important! Accounting Is Fun!
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Required Payroll Records
Employee personal information Name Address Social Security number Date of birth Data on wage payments Dates and amounts of payments Payroll periods Amount of taxable wages paid Dates and amounts earned year to date for the calendar year involved Amount of taxes withheld for each employee by pay period Accounting Is Fun!
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Calendar Year A twelve-month period beginning on January 1 and ending on December 31 of the same year Accounting Is Fun!
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Employees and Independent Contractors
Under “direction and control” of employer Independent contractor Someone who is engaged for a definite job or service Not under “direction and control” of employer Decides how to do his or her own work Payments to independent contractors not subject to withholding or payroll taxes Accounting Is Fun!
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Objective 1 Understand the role of laws that affect payroll deductions and contributions Accounting Is Fun!
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Laws Affecting Employees’ Pay Deductions
Fair Labor Standards Act The act of 1938 that provides for minimum standards for wages and overtime, including provisions related to child labor and equal pay for equal work Current Tax Payment Act An act to require employers to withhold and pay to the Internal Revenue Service employee funds Accounting Is Fun!
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Laws Affecting Employees’ Pay Deductions
FICA Tax (employees’ share) Social Security Act of 1935 and its amendments provide benefits for retired workers, their spouses and minor children, disability insurance, Medicare, and supplemental security income Employees contribute 6.2 percent on first $84,900 earned in a calendar year for Social Security Employees contribute 1.45 percent on all earnings in calendar year for Medicare Accounting Is Fun!
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Laws Affecting Employer’s Payroll Tax Contributions
Federal Insurance Contribution Act (FICA) State Unemployment Tax Act (SUTA) Federal Unemployment Tax Act (FUTA) Workers’ compensation laws Accounting Is Fun!
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FICA Taxes Social Security taxes plus Medicare taxes, paid by both employee and employer under the provisions of the Federal Insurance Contributions Act Employer matches employee contribution Accounting Is Fun!
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State Unemployment Tax Act (SUTA)
A tax levied only on the employer in most states Rates differ among the various states; however, they are generally 5.4 percent or higher on the first $7,000 of total earnings paid to each employee during the calendar year Proceeds used to pay subsistence benefits to unemployed workers Accounting Is Fun!
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Federal Unemployment Tax Act (FUTA)
A tax levied only on the employer, equal to 0.8 percent of the first $7,000 of total earnings paid to each employee during the calendar year This tax is used to support government-run employment offices throughout the country Accounting Is Fun!
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Workers’ Compensation Laws
Laws that protect employees and dependents against losses due to death or injury incurred on the job Accounting Is Fun!
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Payment Periods Weekly Bi-weekly Semimonthly Monthly 26 times a year
Accounting Is Fun!
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Earnings Wages Contract states hourly, weekly, or piecework rate of pay Salary Contract states monthly or yearly earnings Overtime—generally 1 ½ pay, minimums per FLSA Supplemental pay Commissions Bonuses Cost-of-living adjustments Profit sharing Paid by Check or cash Other assets (recorded at market value, or fair value) Accounting Is Fun!
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Performance Objective 2
Calculate total earnings based on an hourly, piece-rate, or commission basis Accounting Is Fun!
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Payroll In earlier chapters we have seen:
The $1, is really gross pay before deductions Gross pay (or earnings) Total amount before deductions Deductions Amounts taken out of an employee’s paycheck each pay period “Take home pay” or net pay Gross pay minus deductions Accounting Is Fun!
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Time Card Accounting Is Fun!
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Calculate Hourly Wages and Overtime
Overtime by Day Method Regular Hour Worked 40 Hours x Hourly Rate $913.60 Overtime Hours Worked Monday - Wednesday Hours x Hourly Rate x Multiple = Thursday 2 Hours x Hourly Rate x Multiple = $ Friday 1 Hours x Hourly Rate x Multiple = 34.26 Saturday 3 Hours x Hourly Rate x Multiple = 102.78 Total Gross Earnings $1,119.16 Overtime Premium Method Regular Pay 46 Total Hours x Hourly Rate $1,050.64 Overtime Premium 6 Overtime Hours x (Multiple - 100%) x Hourly Rate 68.52 Total Gross Earnings $1,119.16 Accounting Is Fun!
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Calculate Hourly Overtime for Salary
Assumptions Monthly Salary $2,250.00 Overtime Multiple 1.5 Hours Worked in One Week 40 Overtime Hours 4 (1) Calculate Hourly Rate First Calculate Yearly Pay Monthly Salary x 12 $27,000.00 Calculate Weekly Pay Yearly Salary / 52 $519.23 Calculate Hourly Pay Weekly Salary / 40 $12.98 (2) Then Calculate Overtime Regular Pay Hours x Hourly Rate $ 519.20 Overtime Pay Hours x Hourly Rate x Multiple $ 77.88 Total Gross earnings $ 597.08 Accounting Is Fun!
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Piece Rate Accounting Is Fun!
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Commission Accounting Is Fun!
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Deductions from Total Earnings
Federal income tax withholding State income tax withholding FICA tax (Social Security and Medicare), employee’s share Purchase of U.S. savings bonds Union dues Insurance deductions (medical or life) Charitable contributions Pension contributions Credit union Automatic savings Automatic loan repayment Other deductions possible Accounting Is Fun!
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Employees’ Federal Income Tax Withholding: Employer Requirements
Withhold federal income taxes from employees’ paychecks Pay the withheld federal income taxes to the IRS Keep required records Accounting Is Fun!
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Basis of Federal Income Tax Withholding
Taxable earnings The amount of an employee’s earnings subject to a tax Marital status Number of withholding allowances claimed Withholding allowance Amount of earnings that are exempt from federal income tax How many? One for personal One for spouse One for each dependent Exemption Amount of yearly earnings that are not taxed Accounting Is Fun!
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Employee’s Withholding Allowance Certificate (Form W-4)
A form that specifies the number of allowances claimed by each employee Gives the employer the authority to withhold money for an employee’s federal income taxes and FICA taxes Must be filled out by every employee Accounting Is Fun!
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Accounting Is Fun!
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Circular E Actual book or downloadable files to use in spreadsheet or accounting program provided free of charge by IRS to employers Contains withholding tables Federal income tax FICA Social Security Medicare Lists rules for employer’s deposits Lists requirements for submitting reports Accounting Is Fun!
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Wage-Bracket Tax Tables
Tables providing the amounts to be deducted for income taxes based on earnings, marital status, and number of allowances claimed Payment periods covered Monthly Semimonthly Biweekly Weekly Daily Accounting Is Fun!
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Using the Tables to Determine Deductions
Step 1: Select correct table for payment period and marital status Step 2: Locate gross pay in first two columns Step 3: Find column for number of withholding allowances Intersection shows amount of federal income tax to withhold from paycheck Be careful of: “At least” “But less than” Accounting Is Fun!
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State Income Tax Withholding
State tables or Percentage of federal income tax deduction Textbook assumes that employee’s state income tax deduction is 20% of the federal income tax deduction Accounting Is Fun!
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FICA Taxes Social Security Taxes
Federal taxes levied on employees and employers Proceeds used for Pension payments after a worker has reached 62 years Disability benefits for disabled worker and dependents Medicare Taxes Federal taxes levied on employees and employers Proceeds used for medical insurance for eligible people age 65 or over Accounting Is Fun!
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FICA Taxes Social Security rate = 6.2% (number equivalent = .062)
Only the first $84,900 of earnings are taxed Medicare rate = 1.45% (number equivalent = .0145) All earnings are taxed Applied to gross earnings during a calendar year Calculated separately because of the different upper limits for two types of taxes Accounting Is Fun!
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Calculating FICA Taxes
Accounting Is Fun!
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Calculating FICA Taxes
Accounting Is Fun!
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Calculating FICA Taxes
Accounting Is Fun!
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Calculating FICA Taxes
Accounting Is Fun!
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Calculating FICA Taxes
Accounting Is Fun!
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Calculating FICA Taxes
Accounting Is Fun!
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Unemployment Taxes Unemployment taxable earnings represent remaining untaxed earnings up to state and federal maximum Not paid by employee in most states Paid by employer on the employee’s behalf Accounting Is Fun!
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Performance Objective 4
Complete a payroll register Accounting Is Fun!
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Payroll Register A multicolumn form prepared for each payroll period listing the earnings, deductions, and net pay for each employee Accounting Is Fun!
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Payroll Register for Week Ended: October 7, 2005
Let’s look at the different sections of the payroll register Accounting Is Fun!
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Compare Beginning Cumulative Earnings with Maximums for Social Security and Unemployment
Accounting Is Fun!
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Calculate Regular and Overtime Earnings
Accounting Is Fun!
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Calculate Ending Cumulative Earnings
Accounting Is Fun!
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Calculate Taxable Earnings
We calculate the amount of earnings that are taxable for the unemployment taxes. We will use this amount in Chapter 9 to calculate the tax. Accounting Is Fun!
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Calculate Deductions From Tables 20% of Fed. Tax 6.2% 84,900 1.45%
Given Given UW = United Way AR = A/R Accounting Is Fun!
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Total Earnings – Total Deductions = Net Pay & Two Different Wages Expenses
Amount Ck. No. Sales Wages Expense Office 276.81 842.35 931.00 1,119.16 175.28 560.02 932.00 735.30 227.18 688.47 933.00 915.65 245.80 827.45 934.00 1,073.25 645.63 1,243.26 935.00 1,888.89 657.09 1,234.58 936.00 1,891.67 532.70 1,066.26 937.00 1,598.96 367.97 903.78 938.00 1,271.75 478.10 1,022.33 939.00 1,500.43 662.34 1,151.17 940.00 1,813.51 328.75 840.08 941.00 1,168.83 929.89 1,956.35 942.00 2,886.24 5,527.54 12,336.10 13,626.97 4,236.67 Expense Account Debited Payments … Accounting Is Fun!
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Performance Objective 5
Journalize the payroll entry from a payroll register Accounting Is Fun!
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Journalize the Payroll Entry from a Payroll Register
Expense Expense Accounting Is Fun!
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Payroll Journal Entry: Expenses
Accounting Is Fun!
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Journalize the Payroll Entry from a Payroll Register
Expense Payables Accounting Is Fun!
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Payroll Journal Entry: Expenses and Payables
Description Post. Ref. Debit Credit 2005 October 7 Sales Wages Expense 13,626.97 Office Wages Expense 4,236.67 Employees’ Federal Income Tax Payable 3,239.00 FICA Tax Payable 1,206.24 Employees' State Income Tax Payable 647.80 Employees' Medical Insurance Payable 260.50 Employees' United Way Payable 124.00 Accounts Receivable 50.00 Wages Payable 12,336.10 Payroll Register, for week ended Oct. 7 General Journal page 5 Date Accounting Is Fun!
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Equivalent to sum of take home pay for all employees
Payroll Journal Entry Although Social Security & Medicare taxes are calculated separately, they are treated as a single payable because they will be paid at the same time Description Post. Ref. Debit Credit 2005 October 7 Sales Wages Expense 13,626.97 Office Wages Expense 4,236.67 Employees Federal Income Tax Payable 3,239.00 FICA Tax Payable 1,206.24 Employees' State Income Tax Payable 647.80 Employees' Medical Insurance Payable 260.50 Employees' United Way Payable 124.00 Accounts Receivable 50.00 Wages Payable 12,336.10 Payroll Register, for week ended Oct. 7 General Journal page 5 Date Equivalent to sum of take home pay for all employees Accounting Is Fun!
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Paying Employees from Regular Checking Account
Accounting Is Fun!
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Paycheck Accounting Is Fun!
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Payroll Bank Account A special checking account used to pay a company’s employees Money transferred from the regular checking account to the payroll account Accounting Is Fun!
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Journal Entry for Paying Employees from Payroll Bank Account
Clear payable with a debit Credit Cash— Payroll Bank Account Accounting Is Fun!
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Performance Objective 6
Maintain employees’ individual earnings records Accounting Is Fun!
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Employee’s Individual Earnings Record
A supplementary record for each employee showing personal payroll data and yearly cumulative earnings, deductions, and net pay Contains source data for the required payroll tax reports Accounting Is Fun!
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Employee’s Individual Earnings Record
Accounting Is Fun!
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Demonstration Problem
Accounting Is Fun!
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Look to Beginning Earnings to Determine If There Are Taxable Earnings
Accounting Is Fun!
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Calculate Ending Cumulative Earnings
Accounting Is Fun!
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Calculate Taxable Earnings
Accounting Is Fun!
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Calculate Deductions Accounting Is Fun!
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Calculate Payments and Expense
Accounting Is Fun!
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Make Journal Entry from Register
Payables Expense Accounting Is Fun!
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Record Salary Expense Accounting Is Fun!
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Record Payables to Make DR = CR
Description Post. Ref. Debit Credit 2005 Oct. 14 Salary Expense 5,309.00 Employees’ Federal Income Tax Payable 533.00 Employees’ State Income Tax Payable 63.96 FICA Tax Payable 217.92 Salaries Payable 4,494.12 Payroll Register for Week Ended October 14, 2005—page 72 General Journal Page 17 Date Accounting Is Fun!
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Journalize Cash Payments to Employees
Description Post. Ref. Debit Credit 2005 Oct. 14 Salary Expense 5,309.00 Employees’ Federal Income Tax Payable 533.00 Employees' State Income Tax Payable 63.96 FICA Tax Payable 217.92 Salaries Payable 4,494.12 Payroll Register for Week Ended October 14, 2005—page 72 Cash—Payroll Bank Account Paid wages for week ended Oct. 14, 2005 General Journal Page 17 Date Accounting Is Fun!
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