1. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Calculating Pay and Payroll Taxes: The Beginning of the Payroll Process Chapter 7

2. Learning Objective 1 Calculating gross pay, employee payroll tax deductions for federal income tax withholding, state income tax withholding, FICA – OASDI/Medicare, and net pay © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

3. The Payroll Process 1. Calculate gross earnings, employee withholding taxes, net pay ◦ Prepare paychecks ◦ Prepare payroll register ◦ Update employee earnings records © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

4. The Payroll Process © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 2.Calculate and pay employer payroll Report payroll and payroll taxes ◦ Forms W-2 and W-3 ◦ Form 941 quarterly LO-1

5. The Payroll Process 3. Record payroll, payroll taxes, and payment of payroll and payroll taxes in general journal 4. Post to accounts in general ledger 5. Report payroll and payroll taxes: Prepare financial statements © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

6. Gross Earnings Employees ◦ Hourly – paid only for hours worked ◦ Salaried – paid fixed dollar amount Pay Period ◦ Daily, weekly, biweekly, semimonthly, monthly, quarterly, annually © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

7. Gross Earnings Regular earnings + Overtime earnings Fair Labor Standards Act - Hourly employee paid time and a half for any hours worked over 40 in one workweek ◦ Employers must follow if doing business in more than one state © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

8. Exercise 7-1A Dawn Slow: 39 hours x $10 regular rate $390 Jill West: 40 hours x $12 regular rate $480 10 overtime hrs x $18 overtime rate180 $660 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

9. Exercise 7-2B Tom Suarez 37 hours x $14 regular rate $518 Jim Martin 40 hours x $12 regular rate$480 8 overtime hrs x $18 overtime rate144 $624 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

10. Federal Income Tax Withholding W-4 Form – Employee’s Withholding Allowance Certificate ◦ Marital status ◦ Total number of allowances Amount withheld based on ◦ Employee’s gross earnings for the pay period ◦ Marital status and allowances ◦ Tables in IRS publication 15 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

11. State Income Tax Withholding Each state has its own laws. This text assumes a fixed percentage of employee earnings. ◦ 43 states charge a state tax © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

12. Other Income Tax Withholding Cities Counties Townships ◦ Have different rates ◦ Employers often don’t withhold ◦ Taxpayers must pay on their own © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

13. Employee Withholding – Social Security Taxes FICA – Federal Insurance Contribution Act Provides ◦ Retirement for persons over 62 years old ◦ Medical benefits for persons over 65 ◦ Benefits for disabled persons ◦ Benefits for families of deceased workers who were covered by this law © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

14. Employee Withholding – Social Security Taxes Two taxes ◦ Old-Age, Survivor’s, and Disability Insurance (OASDI) ◦ Medicare (HI) - Hospital Insurance © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

15. OASDI Limit on amount of tax employee must pay Maximum dollar amount of earnings that can be taxed – wage base Rate for 2008 – 6.2% of wage base of $102,000 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

16. Medicare All wages subject to tax Rate = 1.45% Covers certain medical expenses after an individual turns 65 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

17. Other Withholdings Medical insurance Savings plan Disability insurance Union dues © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

18. Net Pay Gross earnings -Federal income tax -State income tax -OASDI tax -Medicare tax -Other withholdings Net Pay © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

19. Exercise 7-2 Alvin Pang: Gross pay$1,690.00 Federal income tax$237.00 OASDI 104.78 Medicare24.51 Total deductions366.29 Net pay$1,323.71 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

20. Exercise 7-2 Angelina Potts: Gross pay$1,600.00 Federal income tax$249.00 OASDI 99.20 Medicare23.20 Total deductions371.40 Net pay$1,228.60 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

21. Exercise 7-8 Office: $30,000 / $100 = 300 300 x $.21 = $63 Repairs: $84,000 / $100 = 840 840 x $1.70 = 1,428 Total$1,491 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

22. Learning Objective 2 Calculating employer taxes for FICA- OASDI/Medicare, FUTA, SUTA, and workers’ compensation insurance © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

23. Employer Payroll Taxes Social Security taxes – matches employee contribution; both employer and employee pay 6.2% of employee gross wages Unemployment taxes – provide unemployed workers with benefits © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

24. FUTA and SUTA FUTA taxes ◦ Federal Unemployment Tax Act ◦ Pay administration costs, not the benefits SUTA taxes ◦ State Unemployment Tax Act ◦ Pay the benefits © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

25. FUTA and SUTA FUTA taxes ◦ 6.2% on wages earned by each employee up to wage base limit of $7,000 ◦ Allowable tax credit for SUTA tax up to a maximum of 5.4% ◦ Net FUTA tax rate =.8% SUTA taxes ◦ Each state determines wage base limit © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

26. Workers’ Compensation Insurance Insures employees against losses due to accidental injury or death while on the job In most states, paid by employer Gross payroll is estimated and rate is calculated for each $100 of weekly payroll © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

27. Exercise 7-3 EmployeeCumulative Earnings Gross Pay (subject to Medicare) Earnings Subject to OASDI Earnings Subject to FUTA/SUTA J. Kline$3,500$900 A. Met6,600750 400 D. Ring7,900300 0 Totals$1,950 $1,300 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

28. Exercise 7-3 Medicare Tax OASDI Tax FUTA TaxSUTA Tax $1,950 X 1.45% $1,950 X 6.2% $1,300 X.8% $1,300 X 5.6% $28.28$120.90$10.40$78.62=$238.20 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

29. Exercise 7-6 Gross Pay (subject to Medicare) Earnings Subject to OASDI Earnings Subject to FUTA Earnings Subject to SUTA $160,000 X 1.45% $130,000 X 6.2% $100,000 X.8% $100,000 X5.9% $2,320$8,060$800$5,900$17,080 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

30. Learning Objective 3 Preparing a payroll register © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

31. Payroll Register Includes each employee’s Gross earnings Employee withholding taxes Net pay Taxable earnings Cumulative earnings Accounts to be charged © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

32. Payroll Register Some companies will do two registers - one for hourly employees & one for salaried Includes all employee names and social security numbers © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

33. Learning Objective 4 Maintaining an employee earnings record © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

34. Employee Earnings Record Summary of each employee’s ◦ Earnings ◦ Withholding taxes ◦ Net pay ◦ Cumulative earnings Used to prepare quarterly and annual payroll tax reports © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

35. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater End of Chapter 7