8 - 1 The Employer’s Tax Responsibilities: Principles and Procedures Chapter 8
8 - 2 Hiring employees generates more expense than wages expense. Hiring employees generates more expense than wages expense. Government rules are followed for payroll. Government rules are followed for payroll. Employee Taxes Tax returns must be submitted.
8 - 4 Federal & State Regulations n The employer must calculate and record payroll tax expenses as a journal entry. n An EIN (employer identification number) is necessary. n Payroll reports must be submitted on specialized government forms. n Tax payments must be paid on due dates or penalties will be incurred.
8 - 5 Learning Unit 8-1 FICA – Social Security Payable FICA (Federal Insurance Contributions Act) – Employers must match the amount deducted from employees’ checks for Social Security and Medicare. FICA (Federal Insurance Contributions Act) – Employers must match the amount deducted from employees’ checks for Social Security and Medicare. (employee) (employer) FICA – Medicare Payable (employee) (employer)
8 - 6 Learning Unit 8-1 n FUTA (Federal Unemployment Tax Act) n The wage base limit is $7,000 per year for each employee. 6.2% FUTA tax – 5.4% normal FUTA tax credit.8% net FUTA tax for federal purposes 6.2% FUTA tax – 5.4% normal FUTA tax credit.8% net FUTA tax for federal purposes
8 - 7 Learning Unit 8-1 n SUTA (State Unemployment Tax Act) n State rates vary and are merit based. n Rates are higher for seasonal employers. n Each state’s wage base limit is different. n The lowest limit in any state is $7,000 per year for each employee.
8 - 8 Learning Unit 8-1 Accounts Affected Category Rules Payroll tax expense Expense Dr. FICA – Social Security Liability Cr. FICA – Medicare Liability Cr. SUTA Liability Cr. FUTA Liability Cr. Payroll tax expense Expense Dr. FICA – Social Security Liability Cr. FICA – Medicare Liability Cr. SUTA Liability Cr. FUTA Liability Cr.
8 - 9 Learning Unit 8-1 n The following amounts are not deducted from the employees’ pay: – matching amounts for FICA – Workers’ Compensation Insurance – Federal and State Unemployment Insurance (FUTA) & (SUTA)
8 - 10 Completing the Employer’s Quarterly Federal Tax Return and Deposit Coupon (Forms 941 and 8109) and paying tax obligations for FICA tax (Social Security and Medicare) and federal income tax. Learning Objective 2
8 - 11 Learning Unit 8-2 n Form 941 is used to determine the Employer’s Quarterly Federal Tax Return. n It requires FICA information to be separated by Social Security and Medicare. n It lists total gross pay for the quarter. n Total income tax withheld is listed on line 3.
8 - 12 Learning Unit 8-2 n Wages for the period that are subject to FICA Social Security taxes are multiplied times 12.4%. n This rate represents the employee’s share and the matched employer’s share. n Medicare wages are multiplied by 2.9%.
8 - 13 Learning Unit 8-2 n There are usually rounding differences. n These are adjusted on line 9. n This allows exact matching of the form to deposit amounts. n A monthly summary is completed.
8 - 14 Learning Unit 8-2 n The payroll taxes must be deposited in an authorized Federal Reserve Bank. n Form 941 must be accompanied by IRS Form 8109, Federal Deposit Coupon. n The look-back period rule, which views the total amount of payroll taxes paid the previous year, determines the frequency of the deposits.
8 - 15 Learning Unit 8-2 The total time period spans three years. 200120022003 July 1, 2001 This is the look-back period for 2003. June 30, 2002
8 - 16 Preparing Forms W–2, W–3, 940-EZ, and estimates of workers’ compensation insurance premiums. Learning Objective 3
8 - 17 Learning Unit 8-3 n Employers prepare a W–2 form for each employee for the year. n January 31 is the deadline for issuance to employees. n The original copy is mailed to the Social Security Administration. W-2 W-3
8 - 18 Learning Unit 8-3 n Form W-3 (Transmittal of Income and Tax Statements) is mailed with the original copy of the W-2s. n Form 940-EZ: Employer’s Annual Unemployment Tax Return is used to report FUTA for one state. n Employers with employees in more than one state must use Form 940.
8 - 19 Learning Unit 8-3 n Workers’ compensation insurance provides insurance against losses due to accidental injury on the job. n The premium is based on the total estimated gross payroll.
8 - 20 Learning Unit 8-3 n The rate is calculated per $100 of weekly payroll. n At year end, the actual payroll is compared to the estimated payroll. n The employer either will receive credit for overpayment or be responsible for paying additional premiums.