Chapter Eight Employee Earnings and Deductions

Copyright © Houghton Mifflin Company. All rights reserved Performance Objectives 1.Understand the role of laws that affect payroll deductions and contributions 2.Calculate total earnings based on an hourly, piece-rate, or commission basis 3.Determine deductions using tables of employees’ income tax withholding

Copyright © Houghton Mifflin Company. All rights reserved Performance Objectives 4.Complete a payroll register 5.Journalize the payroll entry from a payroll register 6.Maintain employees’ individual earnings records

Copyright © Houghton Mifflin Company. All rights reserved Employer Requirements To withhold federal and state taxes from employees’ paychecks To pay the withholdings (as well as other payments) to government agencies before specific deadlines To submit federal and state reports on official forms This makes payroll accounting very important!

Copyright © Houghton Mifflin Company. All rights reserved Required Payroll Records 1.Employee personal information –Name –Address –Social Security number –Date of birth 2.Data on wage payments –Dates and amounts of payments –Payroll periods 3.Amount of taxable wages paid –Dates and amounts earned year to date for the calendar year involved 4.Amount of taxes withheld for each employee by pay period

Copyright © Houghton Mifflin Company. All rights reserved Calendar Year A twelve-month period beginning on January 1 and ending on December 31 of the same year

Copyright © Houghton Mifflin Company. All rights reserved Employees and Independent Contractors Employee –Under “direction and control” of employer Independent contractor –Someone who is engaged for a definite job or service –Not under “direction and control” of employer –Decides how to do his or her own work Payments to independent contractors not subject to withholding or payroll taxes

Copyright © Houghton Mifflin Company. All rights reserved Objective 1 Understand the role of laws that affect payroll deductions and contributions

Copyright © Houghton Mifflin Company. All rights reserved Laws Affecting Employees’ Pay Deductions Fair Labor Standards Act –The act of 1938 that provides for minimum standards for wages and overtime, including provisions related to child labor and equal pay for equal work Current Tax Payment Act –An act to require employers to withhold and pay to the Internal Revenue Service employee funds

Copyright © Houghton Mifflin Company. All rights reserved Laws Affecting Employees’ Pay Deductions FICA Tax (employees’ share) –Social Security Act of 1935 and its amendments provide benefits for retired workers, their spouses and minor children, disability insurance, Medicare, and supplemental security income –Employees contribute 6.2 percent on first $84,900 earned in a calendar year for Social Security –Employees contribute 1.45 percent on all earnings in calendar year for Medicare

Copyright © Houghton Mifflin Company. All rights reserved Laws Affecting Employer’s Payroll Tax Contributions Federal Insurance Contribution Act (FICA) State Unemployment Tax Act (SUTA) Federal Unemployment Tax Act (FUTA) Workers’ compensation laws

Copyright © Houghton Mifflin Company. All rights reserved FICA Taxes Social Security taxes plus Medicare taxes, paid by both employee and employer under the provisions of the Federal Insurance Contributions Act Employer matches employee contribution

Copyright © Houghton Mifflin Company. All rights reserved State Unemployment Tax Act (SUTA) A tax levied only on the employer in most states Rates differ among the various states; however, they are generally 5.4 percent or higher on the first $7,000 of total earnings paid to each employee during the calendar year Proceeds used to pay subsistence benefits to unemployed workers

Copyright © Houghton Mifflin Company. All rights reserved Federal Unemployment Tax Act (FUTA) A tax levied only on the employer, equal to 0.8 percent of the first $7,000 of total earnings paid to each employee during the calendar year This tax is used to support government- run employment offices throughout the country

Copyright © Houghton Mifflin Company. All rights reserved Workers’ Compensation Laws Laws that protect employees and dependents against losses due to death or injury incurred on the job

Copyright © Houghton Mifflin Company. All rights reserved Payment Periods Weekly Bi-weekly –26 times a year Semimonthly –24 times a year Monthly

Copyright © Houghton Mifflin Company. All rights reserved Earnings Wages –Contract states hourly, weekly, or piecework rate of pay Salary –Contract states monthly or yearly earnings Overtime—generally 1 ½ pay, minimums per FLSA Supplemental pay –Commissions –Bonuses –Cost-of-living adjustments –Profit sharing Paid by –Check or cash –Other assets (recorded at market value, or fair value)

Copyright © Houghton Mifflin Company. All rights reserved Performance Objective 2 Calculate total earnings based on an hourly, piece-rate, or commission basis

Copyright © Houghton Mifflin Company. All rights reserved Payroll In earlier chapters we have seen: The $1, is really gross pay before deductions Gross pay (or earnings) –Total amount before deductions Deductions –Amounts taken out of an employee’s paycheck each pay period “Take home pay” or net pay –Gross pay minus deductions

Copyright © Houghton Mifflin Company. All rights reserved Time Card

Copyright © Houghton Mifflin Company. All rights reserved Calculate Hourly Wages and Overtime Regular Hour Worked40Hours x Hourly Rate$ Overtime Hours Worked Monday - Wednesday0Hours x Hourly Rate x Multiple = Thursday2Hours x Hourly Rate x Multiple =$ Friday1Hours x Hourly Rate x Multiple = Saturday3Hours x Hourly Rate x Multiple = Total Gross Earnings$1, Overtime by Day Method Regular Pay46Total Hours x Hourly Rate$1, Overtime Premium6Overtime Hours x (Multiple - 100%) x Hourly Rate68.52 Total Gross Earnings$1, Overtime Premium Method 0

Copyright © Houghton Mifflin Company. All rights reserved Calculate Hourly Overtime for Salary Monthly Salary$2, Overtime Multiple1.5 Hours Worked in One Week40 Overtime Hours4 Assumptions Calculate Yearly PayMonthly Salary x 12$27, Calculate Weekly PayYearly Salary / 52$ Calculate Hourly PayWeekly Salary / 40$12.98 (1) Calculate Hourly Rate First Regular PayHours x Hourly Rate519.20$ Overtime PayHours x Hourly Rate x Multiple77.88$ Total Gross earnings597.08$ (2) Then Calculate Overtime

Copyright © Houghton Mifflin Company. All rights reserved Piece Rate

Copyright © Houghton Mifflin Company. All rights reserved Commission

Copyright © Houghton Mifflin Company. All rights reserved Deductions from Total Earnings 1.Federal income tax withholding 2.State income tax withholding 3.FICA tax (Social Security and Medicare), employee’s share 4.Purchase of U.S. savings bonds 5.Union dues 6.Insurance deductions (medical or life) 7.Charitable contributions 8.Pension contributions 9.Credit union –Automatic savings –Automatic loan repayment 10.Other deductions possible

Copyright © Houghton Mifflin Company. All rights reserved Employees’ Federal Income Tax Withholding: Employer Requirements Withhold federal income taxes from employees’ paychecks Pay the withheld federal income taxes to the IRS Keep required records

Copyright © Houghton Mifflin Company. All rights reserved Basis of Federal Income Tax Withholding Taxable earnings –The amount of an employee’s earnings subject to a tax Marital status Number of withholding allowances claimed Withholding allowance –Amount of earnings that are exempt from federal income tax –How many? One for personal One for spouse One for each dependent Exemption –Amount of yearly earnings that are not taxed

Copyright © Houghton Mifflin Company. All rights reserved Employee’s Withholding Allowance Certificate (Form W-4) A form that specifies the number of allowances claimed by each employee Gives the employer the authority to withhold money for an employee’s federal income taxes and FICA taxes Must be filled out by every employee

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Copyright © Houghton Mifflin Company. All rights reserved Circular E Actual book or downloadable files to use in spreadsheet or accounting program provided free of charge by IRS to employers Contains withholding tables –Federal income tax –FICA Social Security Medicare Lists rules for employer’s deposits Lists requirements for submitting reports

Copyright © Houghton Mifflin Company. All rights reserved Wage-Bracket Tax Tables Tables providing the amounts to be deducted for income taxes based on earnings, marital status, and number of allowances claimed Payment periods covered –Monthly –Semimonthly –Biweekly –Weekly –Daily

Copyright © Houghton Mifflin Company. All rights reserved Using the Tables to Determine Deductions Step 1: Select correct table for payment period and marital status Step 2: Locate gross pay in first two columns Step 3: Find column for number of withholding allowances Intersection shows amount of federal income tax to withhold from paycheck Be careful of: –“At least” –“But less than”

Copyright © Houghton Mifflin Company. All rights reserved State Income Tax Withholding State tables or Percentage of federal income tax deduction –Textbook assumes that employee’s state income tax deduction is 20% of the federal income tax deduction

Copyright © Houghton Mifflin Company. All rights reserved FICA Taxes Social Security Taxes Federal taxes levied on employees and employers Proceeds used for –Pension payments after a worker has reached 62 years –Disability benefits for disabled worker and dependents Medicare Taxes Federal taxes levied on employees and employers Proceeds used for medical insurance for eligible people age 65 or over

Copyright © Houghton Mifflin Company. All rights reserved FICA Taxes Social Security rate = 6.2% (number equivalent =.062) –Only the first $84,900 of earnings are taxed Medicare rate = 1.45% (number equivalent =.0145) –All earnings are taxed Applied to gross earnings during a calendar year Calculated separately because of the different upper limits for two types of taxes

Copyright © Houghton Mifflin Company. All rights reserved Calculating FICA Taxes

Copyright © Houghton Mifflin Company. All rights reserved Calculating FICA Taxes

Copyright © Houghton Mifflin Company. All rights reserved Calculating FICA Taxes

Copyright © Houghton Mifflin Company. All rights reserved Calculating FICA Taxes

Copyright © Houghton Mifflin Company. All rights reserved Calculating FICA Taxes

Copyright © Houghton Mifflin Company. All rights reserved Calculating FICA Taxes

Copyright © Houghton Mifflin Company. All rights reserved Unemployment Taxes Unemployment taxable earnings represent remaining untaxed earnings up to state and federal maximum Not paid by employee in most states Paid by employer on the employee’s behalf

Copyright © Houghton Mifflin Company. All rights reserved Performance Objective 4 Complete a payroll register

Copyright © Houghton Mifflin Company. All rights reserved Payroll Register A multicolumn form prepared for each payroll period listing the earnings, deductions, and net pay for each employee

Copyright © Houghton Mifflin Company. All rights reserved Payroll Register for Week Ended: October 7, 2005 Let’s look at the different sections of the payroll register

Copyright © Houghton Mifflin Company. All rights reserved Compare Beginning Cumulative Earnings with Maximums for Social Security and Unemployment

Copyright © Houghton Mifflin Company. All rights reserved Calculate Regular and Overtime Earnings

Copyright © Houghton Mifflin Company. All rights reserved Calculate Ending Cumulative Earnings

Copyright © Houghton Mifflin Company. All rights reserved Calculate Taxable Earnings We calculate the amount of earnings that are taxable for the unemployment taxes. We will use this amount in Chapter 9 to calculate the tax.

Copyright © Houghton Mifflin Company. All rights reserved Calculate Deductions From Tables 20% of Fed. Tax Calculate, 6.2% 84,900 Calculate, 1.45% Given UW = United Way AR = A/R

Copyright © Houghton Mifflin Company. All rights reserved Total Earnings – Total Deductions = Net Pay & Two Different Wages Expenses …

Copyright © Houghton Mifflin Company. All rights reserved Performance Objective 5 Journalize the payroll entry from a payroll register

Copyright © Houghton Mifflin Company. All rights reserved Journalize the Payroll Entry from a Payroll Register Expense

Copyright © Houghton Mifflin Company. All rights reserved Payroll Journal Entry: Expenses

Copyright © Houghton Mifflin Company. All rights reserved Journalize the Payroll Entry from a Payroll Register Expense Payables

Copyright © Houghton Mifflin Company. All rights reserved Payroll Journal Entry: Expenses and Payables

Copyright © Houghton Mifflin Company. All rights reserved Payroll Journal Entry Although Social Security & Medicare taxes are calculated separately, they are treated as a single payable because they will be paid at the same time Equivalent to sum of take home pay for all employees

Copyright © Houghton Mifflin Company. All rights reserved Paying Employees from Regular Checking Account

Copyright © Houghton Mifflin Company. All rights reserved Paycheck

Copyright © Houghton Mifflin Company. All rights reserved Payroll Bank Account A special checking account used to pay a company’s employees Money transferred from the regular checking account to the payroll account

Copyright © Houghton Mifflin Company. All rights reserved Journal Entry for Paying Employees from Payroll Bank Account Clear payable with a debit Credit Cash— Payroll Bank Account

Copyright © Houghton Mifflin Company. All rights reserved Performance Objective 6 Maintain employees’ individual earnings records

Copyright © Houghton Mifflin Company. All rights reserved Employee’s Individual Earnings Record A supplementary record for each employee showing personal payroll data and yearly cumulative earnings, deductions, and net pay Contains source data for the required payroll tax reports

Copyright © Houghton Mifflin Company. All rights reserved Employee’s Individual Earnings Record

Copyright © Houghton Mifflin Company. All rights reserved Demonstration Problem

Copyright © Houghton Mifflin Company. All rights reserved Look to Beginning Earnings to Determine If There Are Taxable Earnings

Copyright © Houghton Mifflin Company. All rights reserved Calculate Ending Cumulative Earnings

Copyright © Houghton Mifflin Company. All rights reserved Calculate Taxable Earnings

Copyright © Houghton Mifflin Company. All rights reserved Calculate Deductions

Copyright © Houghton Mifflin Company. All rights reserved Calculate Payments and Expense

Copyright © Houghton Mifflin Company. All rights reserved Make Journal Entry from Register ExpensePayables

Copyright © Houghton Mifflin Company. All rights reserved Record Salary Expense

Copyright © Houghton Mifflin Company. All rights reserved Record Payables to Make DR = CR

Copyright © Houghton Mifflin Company. All rights reserved Journalize Cash Payments to Employees