7–2 Objectives of Payroll Records and Accounting The employer is required to keep records of the following information: 1.Personal data on employee. 2.Data on wage payments. 3.Amount of taxable wages paid. 4.Amount of tax withheld from each employee’s earnings by pay period.
7–3 Key Terms Gross pay is the total amount of an employee’s pay before deductions. Net pay is the take-home pay. An employee is one who is under the direction and control of the employer. An independent contractor is engaged for a definite job or service and may choose his or her own means of doing the work.
7–4 Laws Affecting Employees’ Pay Deductions The Fair Labor Standards Act of 1938 provides for minimum standards for both wages and overtime. The Current Tax Payment Act of 1943 requires employers not only to withhold the tax and then pay it to the U.S. Treasury but also to keep records of the names and addresses of persons employed. The Social Security Act of 1935 (FICA) began as an attempt to provide retired workers with benefits based upon their work history. Currently, FICA consists of Social Security and Medicare. For Social Security, employees contribute 6.2 percent on the first $106,800 earned in a calendar year. Employees contribute 1.45 percent on all earnings in a calendar year with no limit for Medicare.
7–5 Laws Affecting Employer’s Payroll Tax Contributions The employer has to match the amount of FICA taxes withheld from the employee’s wages, and this amount is recorded by debiting Payroll Tax Expense. Each state is responsible for paying its own state unemployment tax. This tax is paid by employers only at the rate of 5.4 percent on the first $7,000 earned by each employee. The Federal Unemployment Tax Act is to provide financial support for the maintenance of government-run employment offices. This tax is paid only by employers only. The rate is 0.8 percent of the first $7,000 of earnings. Workers’ compensation laws protect employees and their dependents against losses due to death or injury incurred on the job.
7–6 The following table presents a summary of the various payroll taxes and who is responsible for each:
7–7 How Employees Get Paid Money paid to a person for managerial or administrative services is usually called a salary, and the time period covered is generally a month or a year. Money paid for either skilled or unskilled labor is usually called wages, and the time period covered is hours or weeks. A company may also supplement an employee’s salary or wage by other benefits such as commissions, bonuses, cost-of-living adjustments, and profit-sharing plans.
7–8 Calculating Wages Mark Anderson, who works for Green Sales Company, is paid $22.95 per hour. The company pays time-and-a-half for hours worked in excess of 40 per week. It pays him double time for any work he does on Sundays and holidays.
7–9 Calculating Wages First Method 40 hours at straight time40 x $22.95 per hour = $ 918.00 2 hours overtime (Thurs.)2 x $34.43 per hour = 68.86 ($22.95 x 1.5 = $34.43) 1 hour overtime (Friday)1 x $34.43 per hour = 34.43 3 hours overtime (Sat.) 3 x $34.43 per hour = 103.29 Total hours and gross wages $1,124.58 46
7–10 Calculating Wages Second Method 46 hours at straight time46 x $22.95 per hour = $1,055.70 Overtime premium: 6 hours overtime 6 x $11.48 per hour = 68.88 ($22.95 x 0.5 = $11.48) Total hours and gross wages $1,124.58 52
7–11 Calculating Salaries Madeline Huan receives a salary of $4,350 per month. She is entitled to overtime pay for all hours worked in excess of 40 during a week at time-and-a-half her regular rate. This past week she worked 44 hours. $4,350 per month x 12= $52,200 per year $52,200 per year ÷ 52 weeks = $1,003.85 per week $1,003.85 per week ÷ 40 hours= $25.10 per regular hour $25.10 per regular hour x 1.5= $37.65 per overtime hr. Earnings for 44 hours: 40 hours at straight time (from above) = $1,003.85 4 hours overtime (4 x $37.65) = 150.60 Total gross earnings$1,154.45
7–12 Piece-Rate Workers under the piece-rate system are paid at the rate of so much per unit of production. If John Joseph, a strawberry picker, is paid $3 for each box of strawberries picked, how much would he earn if he picked 24 boxes? 24 x $3 = $72
Commissions Some salespersons are paid on a purely commissions basis. A more common arrangement is a salary plus a commission or bonus. Lora Brown receives an annual salary of $44,000. Her employer pays her a 5 percent commission on sales during the year in excess of $200,000. Her total sales are $445,000. Regular salary$44,000 Commission: Her sales for the year= $445,000 No commission level= 200,000 $245,000 $245,000 x 0.05 12,250 Total earnings$56,250
7–14 Common Deductions from Total Earnings 1.Federal income tax withholding 2.State income tax withholding 3.FICA taxes (Social Security and Medicare), employee’s share 4.Union dues 5.Medical insurance premiums and medical expenses under a flexible spending plan 6.Contributions to charitable organizations 7.Repayment of personal loans from the company. 8.Savings through the company 401(k) plan 9.Dependent care expenses under a flexible spending plan (subject to a $5,000 limit)
7–15 Employees’ Federal Income Tax Withholding Employers are required to withhold employees’ taxes and then pay them to the U.S. Treasury. Employers have to keep records of the names and addresses of persons employed. A withholding allowance is an amount of an individual’s earnings that is exempt from income taxes. Each employee has to fill out an Employee’s Withholding Allowance Certificate (Form W-4).
7–16 Publication 15 (Circular E), Employer’s Tax Guide and Publication 15-T Publication 15 (Circular E) contains the rules for depositing federal income, Social Security, and Medicare taxes. Publication 15-T contains the withholding tables for these taxes. Both publications are provided free of charge by the Internal Revenue Service.
7–17 Employees’ Federal Income Tax Withholding The payroll register is a manual or computerized schedule prepared for each payroll period listing the earnings, deductions, and net pay for each employee.
7–18 Taken from employees’ time records. Amount earned between Jan. 1 and Sept. 30 First 40 hours multiplied by regular hourly rate Overtime multiplied by employee’s overtime rate Regular earnings plus overtime Beginning cumulative earnings plus total earnings The untaxed portion of the employee’s first $7,000 Analysis of Payroll Register
(continued) 7–19 Weekly payroll amount subject to Social Security tax Weekly payroll amount subject to Medicare tax Deduction based on federal wage- bracket tables Deduction based on state wage- bracket tables Column (I) x 0.062 Column (J) x 0.0145 Employees’ voluntary withholdings The deductions and taxes summed Analysis of Payroll Register
7–20 Each employee’s take-home pay Number of each employee’s payroll check Employees involved in sales activities Employees involved in office activities Analysis of Payroll Register
7–21 The Payroll Entry Because the payroll register summarizes the payroll data for the period, it is used as the basis for recording the payroll in the ledger accounts. The accountant records the total cost to the company for services of employees as debits to the Wages Expense accounts. Total Social Security tax deductions and total Medicare tax deductions are combined to become FICA Taxes Payable.
7–22 Special Payroll Bank Account—An Alternative A firm with a large number of employees would probably open a special payroll bank account. One check drawn on the regular bank account is made payable to the special payroll bank account for the amount of the total net pay for a payroll period. All payroll checks are then written on the special payroll bank account.