1. College Accounting, by Heintz and Parry
Chapter 9:
Payroll Accounting: Employee Earnings and Deductions

2. Eddie’s job duties for The CD Side of Town included the processing of payroll. Nick Flannery, as store manager, was the only person considered to be on salary (earning the same weekly paycheck no matter how many hours he worked). Eddie and the other three part-time salespeople received wages paid on an hourly basis. (Eddie’s wage was highest because he had the added responsibility of the bookkeeping.) Eddie added up the hours punched in on the time cards and then started on the payroll register (the document used to accumulate information on pay and deductions). The first employee, Rob Dillon, worked 44 hours the first week because the grand opening was so busy. Question: What is the federal law on how to calculate overtime pay for hourly employees?

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Answer: Hourly employees must be paid time and a half for all hours worked over Rob’s $7/hour pay was calculated this way: Regular pay: 40 hours X $7 = $280 Overtime pay: 4 hours X $7 X 1.5 = Total Pay (or Gross Pay) = $322

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Eddie put this information into his payroll register and it looked like this: earnings taxable earnings name allow. m. stat. regular overtime total cum. tot. un. comp. soc. sec. R. Dillon s Allowances (allow.) and marital status (m. stat.) will be needed to calculate federal income tax. They are found on the employee’s W-4 form. The cumulative total (cum. tot.) column shows earnings for the calendar year so far. It’s needed to calculate the “taxable earnings” columns. Unemployment compensation (un. comp.) is paid on behalf of the employees until they’ve made $7,000 during the year, and then not again until the following year. Social Security (soc. sec.) is paid by both employer and employee until the employee makes more than a specified amount ($68,400 in 1998) for the year. Therefore, Eddie needs to track how much employees have made this calendar year and calculate how much falls beneath the limits, which makes it “taxable.”

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Eddie calculates federal income tax (FIT) based on gross pay, allowances, and marital status. Charts are used to find the appropriate tax to be withheld from the employee’s check. Example: Single Person Chart Allowances Gross Pay at least: but less than: Chart information goes onto the payroll register in the deductions section: deductions name allow. m. stat. FIT SS tax MEDI tax CITY tax Health Ins. R. Dillon s

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Social Security Tax (SS tax) is calculated by taking the amount in the “Taxable Earnings” column for “Social Security” and multiplying by the federal tax rate of 6.2%. For Rob Dillon: X 6.2% = $ Eddie put this information into his payroll register and it looked like this: taxable earnings deductions name soc. sec FIT SS tax MEDI tax CITY tax Health Ins. R. Dillon

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Medicare Tax (MEDI tax) is calculated by taking the Total Earnings and multiplying by the federal tax rate of 1.45%. For Rob Dillon: X 1.45% = $4.67 Eddie put this information into his payroll register and it looked like this: Earnings deductions name Total FIT SS tax MEDI tax CITY tax Health Ins. R. Dillon

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State Income Tax (STATE tax) varies by state but is often based on a percentage of Total Earnings. In this case, the state income tax rate is 2%. For Rob Dillon: X 2% = $6.44 The payroll register now looked like this: Earnings deductions name Total FIT SS tax MEDI tax STATE tax Health Ins. R. Dillon

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Health Insurance (Health Ins.), unlike the deductions previously discussed, is an example of a voluntary deduction. Other common voluntary deductions include direct deposits, 401(k) plans, and United Way contributions. In this case, The CD Side of Town pays 25% of the health insurance premium, and Rob pays the other 75%, which comes out to be $14.17 per week. The relevant parts of the payroll register now looked like this: Earnings deductions name Total FIT SS tax MEDI tax STATE tax Health Ins. R. Dillon

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Eddie can now add up Rob’s total deductions and calculate his net pay (the amount on his paycheck) using the formula Total Earnings - Total Deductions = Net Pay = The relevant parts of the payroll register now looked like this: Earnings deductions name Total FIT SS tax MEDI tax STATE tax Health Ins. Total Net Pay R. Dillon

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Though useful, the payroll register is not a journal, so Eddie must make a journal entry to record the payroll information for all employees. See if you can figure out where the payroll register totals go, using Rob’s payroll as an example. Questions: 1)What amount should be used for the debit to “Wage and Salary Expense”? 2) What type of account should the deductions go into? 3) The credit to cash should be for what amount? Earnings deductions name Total FIT SS tax MEDI tax STATE tax Health Ins. Total Net Pay R. Dillon

12. Answers: 1) The Total Earnings of $322 are the debit to Wage and Salary Expense. 2) The deductions go into liability accounts, because all of these amounts will eventually be paid to the government (taxes) or to private companies (voluntary deductions). 3) The credit to cash should be for $243.76, the amount of net pay. Date Description P. R. Debit Credit Mar. 17 Wage and Salary Expense Fed. Income Tax Payable Soc. Sec. Tax Payable Medicare Tax Payable State Income Tax Payable Health Insurance Premium Pay Cash