Chapter 8 Paying the Payroll, Depositing Payroll Taxes, and Filing the Required Quarterly and Annual Tax Forms: The Conclusion of the Payroll Process

Learning Objectives Pay Payroll and Deposit Taxes Prepare Quarterly Reports for Federal and State Governments Prepare Annual Reports, Forms W-2 and W-3

In Chapter 7, we learned how to calculate: Pay, Record, and Report In Chapter 7, we learned how to calculate: gross earnings employee withholding taxes net pay employer payroll taxes We now look at how businesses pay, record, and report these amounts

Familiar Payroll Accounts

Learning Objective 1 Pay Payroll and Deposit Taxes

Transferring Funds to the Payroll Account The following journal entry illustrates the transfer of funds from the general bank account to the payroll bank account. The following journal entry illustrates the distribution of the payroll dated October 29.

Paycheck and Stub Figure 8.1 Stephanie Higuera’s Paycheck and Stub

Depositing Payroll Taxes Both employers and employees pay payroll taxes Employers continue recording the various tax liabilities until it is time to remit to the tax authorities Every employer must get a federal identification number (EIN) A number assigned by the IRS that is used by an employer when recording and paying payroll and income taxes. To get an EIN, an employer fills out Form SS-4

Depositing Payroll Taxes After the paychecks have been released, the company needs to pay the IRS the federal taxes owed. The Monthly Summary of Payroll Registers for October lists each biweekly payroll actually paid in October. This worksheet helps Katherine compute the 941 tax deposit needed for the month.

Depositing Payroll Taxes Figure 8.4 Worksheet Summary of Payroll Register

Depositing Payroll Taxes To compute the tax deposit, Katherine will add the total October federal income tax and twice the FICA taxes. Travelwithus.com is a monthly depositor, the total deposit for the three October pay dates must be paid to the IRS on or before November 15.

Depositing Payroll Taxes View the general ledger accounts for October Form 941 taxes:

Depositing Payroll Taxes The IRS determines a company’s tax depositor classification by reviewing the taxes paid during the look-back period. This period of time is a 12-month period that starts July 1 of the previous year If a company’s payroll tax liability was less than $50,000 in that 12-month period, the company is considered a monthly depositor. If the company owes more than $50,000 during that timeframe, the company is considered a semiweekly depositor.

Depositing Payroll Taxes Figure 8.2 Look-Back Illustration

FIT and FICA Transmitted to the Treasury Department using the Electronic Federal Tax Payment System (EFTPS) If company owes < $2,500 in total taxes deposit quarterly Monthly depositor – deposit taxes on 15th day of every month Employer pays less than $50,000 of Form 941 taxes during look-back period Semiweekly depositors – deposit taxes within three banking days Employer pays more than $50,000 of Form 941 taxes during look-back period

Employer’s Quarterly Federal Tax Return, Form 941 Requires all employers to complete tax returns reporting FICA OASDI, FICA Medicare, and FIT taxes If taxes total less than $2,500 for a calendar year, employers prepare Form 944, Employer’s Annual Federal Tax Return Due by January 31 of the following year If taxes total more than $2,500 for a calendar year, employers prepare Form 941, Employer’s Quarterly Federal Tax Return Due every quarter

Depositing Payroll Taxes General Rules: One-Day Rule: If the payroll tax liability for either classification above exceeds $100,000 at any time during the quarter, the company must deposit all taxes by the close of the next business day Deposits Not Required: If the company is very small, and the tax liability is less than $2,500 for the quarter, the taxes can be sent with the 941 quarterly report. Exceptions: If the deposit date falls on a Sat, Sun, or holiday, the deposit date is extended to the next business day. Semiweekly depositors only: If a holiday falls on any of the three banking days referenced, the company gets one additional day to deposit.

Learning Objective 2 Prepare Quarterly Reports for Federal and State Governments

FIT and FICA Form 941, the Employer’s Quarterly Federal Tax Return Use worksheet to complete the form

Form 941 At the end of the calendar year, someone prepares the Form 941 following line-by-line instructions. Figure 8.5 Completed Form 941

Figure 8.5 Completed Form 941 (cont.)

Learning Objective 3 Prepare Annual Reports, Forms W-2 and W-3

Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return Prepared at end of calendar year Filed by January 31 following year If taxes have be paid in full, then the firm has until February 10 Reports the amount of unemployment tax due for the year Calculated on total wages, not individual earnings

Form 940 At the end of the calendar year, someone prepares the Form 940 following line-by-line instructions. Figure 8.6 Completed Form 940

Figure 8.6 Completed Form 940 (cont.)

W-2: Wage and Tax Statement Prepared by employer each calendar year Provides summary of gross earnings and deductions to each employee Copies provided to: Employee IRS State and Local Governments Social Security Administration Company records

Sample W-2 Figure 8.7 Stephanie Higuera’s W-2 Form

Form W-3: Transmittal of Income and Tax Statements Reports Total amounts of wages, tips, and compensation paid to employees Total OASDI and Medicare taxes withheld Sent to a Social Security Administration with copies of each employee’s W-2

Sample W-3 Figure 8.8 Travelwithus.com’s W-3 Form

Summary of the chapter The payroll register provides the data for journalizing the payroll in the general journal. Deductions for payroll withholding taxes represent liabilities of the employer until paid. The Accounts Charged columns of the payroll register indicate which accounts will be debited to record the total wages and salaries expense when a journal entry is prepared. The accounts FICA OASDI Payable and FICA Medicare Payable accumulate the tax liabilities of both the employer and the employee for OASDI and Medicare taxes.

Summary of the chapter The payroll tax expense is recorded at the same time that the payroll is recorded. Paying a payroll results in debiting Wages and Salaries Payable and crediting Cash or Payroll Cash. Federal Form 941 is prepared and filed no later than one month after the calendar quarter ends. It reports the amount of FIT, OASDI, and Medicare tax withheld from employees and the OASDI and Medicare taxes due from the employer for the calendar quarter. FIT, OASDI, and Medicare taxes are known as Form 941 taxes.

Summary of the chapter The total amount of Form 941 taxes paid by a business during a specific period of time determines how often the business will have to make its payroll tax deposits. This time period is called a look-back period. Businesses will normally make their payroll tax deposits to pay their Form 941 taxes either monthly or semiweekly. Different deposit rules apply to monthly and semiweekly depositors and these rules determine when deposits are due. Form 941 payroll tax deposits must be made—if the payment is less than $2,500 per quarter it is made—by check at the time the Form 941 is submitted.

Summary of the chapter Information to prepare W-2 forms can be obtained from the individual employee earnings records. Form W-3 is used by the Social Security Administration in verifying that taxes have been withheld as reported on individual employee W-2 forms. Form 940 is prepared by January 31, after the end of the previous calendar year. This form can be filed by February 10 if all required deposits have been made by January 31. If the amount of FUTA taxes is equal to or more than $500 during any calendar quarter, the deposit must be made no later than one month after the quarter ends.

Summary of the chapter If the amount is less than $500, no deposit is required until the liability reaches the $500 point or until the year ends, when any tax due must be paid by January 31 of the following year. The premium for workers’ compensation insurance based on estimated payroll for the year is paid at the beginning of the year by the employer to protect against potential losses to its employees due to accidental death or injury incurred while on the job.

Questions?

Figure 8.3 Semiweekly Deposit Rules Illustration

Figure 8.9 Travelwithus.com’s Employee YTD Earnings Summary