Payroll Concepts and Procedures – Employee Taxes Chapter 7 1 2

Employee Taxes Employer acts as a collection (and distribution) center for taxes and other deductions.

Federal and State Regulations Maintaining an accurate payroll system Strong internal control is maintained. Records must contain checks and balances. Due dates for reports have to be met. Employees hold deductions that must be recognized as liabilities until amounts are submitted to agencies. 3 4

Calculating overtime pay, income tax withholding. Learning Objective 1 Calculating overtime pay, FICA, deductions for Social Security and Medicare, and federal income tax withholding. 3 4

Introduction to Payroll Learning Unit 7-1 Introduction to Payroll The Fair Labor Standards Act requires overtime pay for hours worked over 40 hours in any work week for interstate commerce businesses. Amounts over 40 hours are paid 1½ times the regular pay rate (exceptions exist at 44 hours minimum for some industries). 4 5

Learning Unit 7-1 Withholding for Federal Income Taxes (FIT) requires employees to complete Form W-4. Employers use this information to deduct appropriate amounts found in the wage bracket tables provided by the IRS. 5 6

Learning Unit 7-1 Withholding for Federal Insurance Contributions Act (FICA): Social Security: Employers deduct 6.2% of gross earnings up to a maximum ($76,200) base limit for each employee each year. Medicare: Employers deduct 1.45% of gross earnings from each employee’s paycheck every payday (there is no limit). 6 7

Learning Unit 7-1 Withholding for State and Local Income Taxes (SIT) requires employers to withhold taxes from employees’ paychecks for any jurisdictions that assess these taxes. Other deductions: Employees agree to voluntary deductions for items such as medical insurance, union dues, and charitable contributions. 7 8

Preparing a payroll register. Learning Objective 2 Preparing a payroll register. 3 4

Learning Unit 7-2 The Payroll Process Terminology Allowances and Marital Status: Information is required to determine the correct amount to deduct for federal income tax. 10 11

Learning Unit 7-2 The Payroll Process Cumulative (YTD) Earnings: This is the amount of earnings from January 1 of the current year to the payroll date. This amount is needed when computing FICA, FUTA, SUTA, and any other deductions which have maximum wage limit caps. 11 12

Learning Unit 7-2 The Payroll Process Salary for Pay period, Hours, and Wages per Hour: This is for computation of gross earnings of each employee. Regular Earnings: This is the base salary or regular earnings of each employee for the current payroll period. 12 13

Learning Unit 7-2 The Payroll Process Overtime earnings: Time and a half pay is usually used for wage-earning employees. Salaried employees sometimes have commissions to add to their base pay. 12 13

Learning Unit 7-2 The Payroll Process Gross Earnings: This is calculated using base salary plus commissions, if any, and regular plus overtime earnings of each employee for the current payroll period. Cumulative Earnings (YTD): This amount is carried forward to the next payday. 13 14

Learning Unit 7-2 The Payroll Process Taxable Earnings – Unemployment Insurance: This is calculated based on the first $7,000 wage limit for each employee. This column shows the earnings subject to unemployment tax. If it is blank, the employee has reached the limit, and no further tax is assessed. 14 15

Learning Unit 7-2 The Payroll Process Taxable Earnings (FICA – Social Security): This shows the amount of earnings to multiply times 6.2% and equals...the FICA Deduction. Taxable Earnings (FICA – Medicare): Current period gross earnings is multiplied by 1.45% to compute the amount of Medicare to deduct and equals...

Learning Unit 7-2 The Payroll Process FICA Deduction – Social Security Tax FICA Deductions – Medicare Tax Federal Income Tax (FIT): All earnings are subject to Federal Income Tax. State Income Tax (SIT): All earnings are taxed. 15 16

Learning Unit 7-2 The Payroll Process Medical Insurance Net pay: This is the amount of the paycheck. Check Number

Learning Unit 7-2 The Payroll Process Gross earnings $934.20 Less: FICA–Social Security tax 57.92 FICA–Medicare tax 13.55 Federal income tax 108.00 State income tax 74.74 Medical Insurance 22.00 Net Pay $657.99

Learning Unit 7-2 The Payroll Process Payroll register This is used to record cumulative and current earnings plus deductions. It provides totals needed for the computation of payroll taxes for all employees. 16 17

Learning Unit 7-2 The Payroll Process Payroll register To verify and cross-check amounts, a separate page must be maintained for each employee. This page provides information to prepare each employee’s W-2 form at the end of each calendar year. 16 17

Journalizing and posting Learning Objective 3 Journalizing and posting the payroll entry from the payroll register. 3 4

Learning Unit 7-3 Analyst Expense 934.20 Programming Expense 3,748.94 FICA SS Tax Payable 290.35 FICA Medicare Tax Payable 67.91 Federal income Tax Payable 791.00 State income Tax Payable 374.65 Medical Insurance Payable 88.00 Wages and Salaries Payable 3,071.23 To record payroll for August 20, 200x 17 18

Payroll checking accounts: Learning Unit 7-3 Payroll checking accounts: A separate account is used in which only the amount of the net pay is placed. From this account, the payroll checks are written. Payroll checking accounts are used for good internal control purposes. 18 19

Learning Unit 7-3 Payroll checks show the individual employee earnings record on the paycheck stubs. This earnings record lists current and cumulative payroll information for the employee.

Maintaining an individual employee earning record. Learning Objective 4 Maintaining an individual employee earning record. 3 4

Employee Earnings Record Employee Earnings Record First Quarter 200x Earnings Summary Deductions Net Pay Cumulative earnings (YTD)

End of Chapter 7