0. Calculating Gross Earnings
SECTION 12.1
Using a Payroll System
A payroll is a list of employees and payments due to each employee for a specific pay period. Businesses with many employees can have a payroll clerk.
A well-designed payroll system achieves the following goals:
The collection and processing of all information needed to prepare and issue payroll checks.
The generation of payroll records needed for accounting purposes and for reporting to government agencies, management, and others.
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1. Calculating Gross Earnings
SECTION 12.1
Computing Gross Pay
The amount of money an employee earns in a pay period is called gross earnings, or gross pay. Employees are grouped into different pay categories to help the employer compute the gross pay:
salary
hourly wage
commission
salary plus commission or bonus
piece rate
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2. Calculating Gross Earnings
SECTION 12.1
Salary
A common method of paying employees is by salary, a fixed amount of money paid each pay period regardless of the number of hours worked.
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3. Calculating Gross Earnings
SECTION 12.1
Hourly Wage
Another common method of paying employees is the hourly wage, an amount of money paid at a specified rate per hour worked. Employees are sometimes required to use a time card to record hours worked.
Some businesses use electronic badge readers to track employees’ work hours.
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4. Calculating Gross Earnings
SECTION 12.1
Commission
Sales employees are often paid a commission, a percentage of the employee’s sales.
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

5. Calculating Gross Earnings
SECTION 12.1
Salary Plus Commission or Bonus
Some sales employees are paid a base salary plus a commission or bonus based on their sales.
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

6. Calculating Gross Earnings
SECTION 12.1
Piece Rate
Employees receive piece rate when they are paid for each item they produce.
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

7. Calculating Gross Earnings
SECTION 12.1
Overtime Pay
Employers are generally required to pay overtime when employees work more than 40 hours per week. The overtime rate, as set by the Fair Labor Standards Act of 1938, is 1.5 times the employee’s regular pay rate. Salaried employees are sometimes entitled to overtime pay as well.
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

8. Payroll Deductions Deductions Required by Law
SECTION 12.2
Deductions Required by Law
An amount subtracted from gross earnings is a deduction. Deductions include those required by law and those an employee wishes to have withheld.
An employer is required by law to withhold payroll taxes. These taxes include:
Federal income tax
Social security tax
City and state income tax
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9. Payroll Deductions Deductions Required by Law Federal Income Tax
SECTION 12.2
Deductions Required by Law
Federal Income Tax
Employers withhold income tax based on the estimated income tax the employee will owe. If too much is withheld the Internal Revenue Service (IRS) refunds the overpayment.
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

10. Payroll Deductions Form W-4
SECTION 12.2
Form W-4
The amount of income tax withheld depends on:
the employee’s marital status
the number of allowances the employee claims
the employee’s gross earnings
The first two items are found on the employee’s Form W-4 (Employee’s Withholding Allowance Certificate).
A withholding allowance reduces the amount of income tax withheld.
Some employees are exempt from tax withholding.
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

11. Payroll Deductions Form W-4 SECTION 12.2
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12. Payroll Deductions Tax Tables
SECTION 12.2
Tax Tables
IRS tables can be used to determine the amount of federal tax to withhold. There are many tax tables available.
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

13. Payroll Deductions Deductions Required by Law Social Security Tax
SECTION 12.2
Deductions Required by Law
Social Security Tax
Social security taxes are also collected by employers. The Federal Insurance Contributions Act (FICA) established social security taxes in 1935.
FICA taxes have two components:
social security–provided as old age and disability insurance and survivors’ benefits
Medicare–provides health insurance for people who are elderly or disabled
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

14. Payroll Deductions Deductions Required by Law
SECTION 12.2
Deductions Required by Law
State and Local Income Taxes
Many states and some cities tax earnings of people who live or work within their boundaries.
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15. Payroll Deductions Voluntary Deductions
SECTION 12.2
Voluntary Deductions
Employers can also deduct voluntary amounts from their employee’s check at the employee’s request. These types of deductions can include:
union dues
health insurance payments
life insurance payments
U.S. savings bonds
charitable contributions
pensions
credit union deposits and payments
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

16. Payroll Deductions Voluntary Deductions
SECTION 12.2
Voluntary Deductions
The 401(k) plan is a popular voluntary payroll deduction that allows employees to save tax-free dollars for retirement.
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17. Payroll Records Preparing the Payroll Register
SECTION 12.3
Preparing the Payroll Register
A payroll register helps employers keep accurate payroll records. Payroll registers consist of seven parts:
1. Total Hours Column
2. Rate Column
3. Earnings Section
4. Deductions Section
5. Net Pay Column
6. Check Number Column
7. Column Totals
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18. Payroll Records Preparing the Payroll Register SECTION 12.3
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19. Payroll Records Paying Employees
SECTION 12.3
Paying Employees
Small businesses write payroll checks straight from the company’s regular checking account. Large businesses have a separate payroll checking account to issue payroll checks. Employees can be paid by check or by direct deposit (net pay is electronically deposited in the employee’s personal bank account).
Glencoe Accounting Unit 3 Chapter 12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

20. Payroll Records The Employee’s Earning Record
SECTION 12.3
The Employee’s Earning Record
An employer must also keep an employee’s earnings record. The earnings record and the payroll register have the same amount columns. In addition, it has the accumulated earnings column, an employee’s year-to-date gross earnings.
Many companies use computers and special software to prepare payroll to reduce errors and improve productivity.
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21. Payroll Records Managerial Implications for Payroll Accounting
SECTION 12.3
Managerial Implications for Payroll Accounting
Because wages and salaries are a large part of a company’s expenses, accurate payroll records are important. Payroll records can be used
to determine if overtime is justified, and
to compare actual amounts to budgeted amounts to reveal unplanned overtime.
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