CHAPTER 6 ANALYZING & JOURNALIZING PAYROLL TRANSACTIONS PAYROLL TRANSACTIONS Payroll Accounting 2010 Bernard J. Bieg and Judith A. Toland Developed by Lisa Swallow, CPA CMA MS

Accounting for Payroll Transactions  Payroll requires entering data (in order) in the following places:  Payroll Register  Employee Earnings Records  General Journal  Journalize gross wages and withholdings  Journalize payroll taxes and workers’ compensation  Journalize period-end accruals  Post to General Ledger

Payroll Register  First – record info in payroll register  Lists employees in rows and shows following information for each  Gross wages  Taxes withheld and other deductions  Net pay  Payroll register shows (in columns)  Total of gross wages, each deduction and net  When completed, should “foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number *Use payroll register to journalize*

Employee’s Earnings Record  Second – transfer info to employees’ earnings records  Used to track cumulative totals (wages and taxes)  Enter row of data for each pay period  Important because different wage caps for FUTA, SUTA and OASDI taxes  Need to track cumulative totals in order to issue W-2s and do quarterly SUTA reports  Used to prepare payroll analyses - various internal and external reports  Might be used to settle employee grievances

Recording Gross Payroll & Withholdings  Third - enter information into accounting system  Gross payroll is debited  Each withholding tax is a liability  Note: Advance EIC reduces FIT Payable  All other payroll deductions are liabilities as well

Recording Gross Payroll & Withholdings (Continued)  Any deduction that the ER makes from EE’s paycheck goes into a liability account (because they owe it to someone) such as:  Group life insurance premiums  Health insurance premiums  Purchase government savings bonds  Union dues  Deferred compensation (contributions to pension plan)  Child support/other garnishments

Garnishments  A creditor can, through the courts, seek repayment of his/her money by garnishment  ER is required to comply with garnishment order  ER must withhold funds from EE’s paycheck and submit it to appropriate authorities  Garnishments limited based upon Consumer Credit Protection Act (CCPA) and vary for  Child support (see next slide)  Creditors  Administrative wages  Student loans Note: state tax levies are exempt from CCPA

Child Support  Family Support Act requires immediate withholding for child-support payments  Child support takes precedence over most deductions  ER can withhold a state mandated fee for administration  Some states now require electronic submission of garnished child support payments  Maximum amount that can be withheld from a person’s weekly disposable earnings varies according to different support orders, but can be as high as 55-65% of disposable earnings

Federal Tax Levy  These levies take second priority after child support  Amount of taxpayer’s standard deduction is only amount that is exempt from a federal tax levy  $5,700 for single and $11,400 for married  IRS issues Form 668-W to notify ER of a tax levy  ER required to withhold until Form 668-D (Release of Levy) received

Pension & Retirement Contributions  Pension plans that involve employee contributions result in liability for the employer  Recorded in payroll entry  Pension Protection Act of 2006 gives company ability to automatically enroll employees in company’s plan and deduct contributions from pay

Methods of Paying Wages & Salaries  Cash/check  Sometimes separate payroll account maintained to make bank reconciliation process easier  Electronic payment methods  EFTS (electronic funds transfer system)  Electronic records created showing bank, account # and net pay  Pay cards allow ER to deposit payroll into prepaid card  Card utilized like debit or credit card  Over 25% of employees who do not have bank accounts use these  Final pay  Many states set time limit between termination and final wage pay out (depends upon whether worker left voluntarily)  CA and MI require immediate payment if EE is fired

Journal Entries to Record Payroll  Journal Entry #1 - Record gross wages, withholdings and net pay  Journal Entry #2 - Record employer’s payroll tax expense These two journal entries are always the same in format. You must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example).

Journal Entry #2  Debit Payroll Tax Expense for total of all payroll taxes that ER pays  Credit each account - they are all liabilities Calculate all employer taxes utilizing varying wage bases and percentages Journal entry #2 Payroll Tax Expense FUTA Payable 1.72 SUTA Payable OASDI Payable HI Payable 26.75

Recording Deposit of Payroll Taxes Look in general ledger for amounts due  Deposit 941 taxes  Deposit state income tax  Deposit SUTA

Workers’ Compensation Insurance  Workers’ compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities  Laws differ by state  Premiums often calculated based on employment classification – stated in terms of $100 per payroll  Pay premiums in advance based on projected wages  Then, at year-end, report actual wages and pay additional premium or may receive credit towards next year

Journal Entry for Workers’ Compensation  Debit Work Comp. Insurance Expense for premium paid  Credit Cash (if paying) or Insurance Payable (if accruing) Journal entry Workers’ Comp. Insurance Expense99.67 Cash or Workers’ Comp Insurance Payable99.67

Journalize Period-End Accruals  Accrued wages should be recorded for wages earned by workers, but not yet paid Journal entry Wage Expense 1, Wages Payable1,  Accrued vacation pay should be recorded for amount of vacation pay owed employees - many employers now merging sick time and vacation time Journal entry Vacation Benefits Expense Vacation Benefits Payable Note: Not necessary to accrue payroll tax expense at year-end

Summary of Accounts Used Account TitleNormal BalanceType of Account FIT PayableCreditLiability SIT PayableCreditLiability Insurance PayableCreditLiability Workers’ Comp Insurance Payable CreditLiability Union Dues PayableCreditLiability Wages PayableCreditLiability Vacation Benefits Payable CreditLiability

Summary of Accounts Used Account TitleNormal BalanceType of Account Wage ExpenseDebitExpense Payroll Tax ExpenseDebitExpense Workers’ Compensation Insurance Expense DebitExpense Vacation Benefits Expense DebitExpense OASDI PayableCreditLiability HI PayableCreditLiability FUTA PayableCreditLiability SUTA PayableCreditLiability