2 Calculating Gross Earnings Using a Payroll SystemPayroll is a list of the employees and the payments due to each employee for a specific pay period.Pay period is the amount of time over which an employee is paid.WeeklyBiweeklySemimonthlyMonthlyA payroll system:Collects and processes all information needed to prepare and issue payroll checksGenerates payroll records for accounting and reporting purposesPg 310
3 Payroll ClerksBusinesses with many employees often hire a payroll clerk. Their responsibilities usually include:Making sure employees are paid on timeMaking sure each employee is paid the correct amountCompleting payroll recordsSubmitting payroll reportsPaying payroll taxesPg 310
4 Computing Gross PayGross Earnings (pay) – the total amount of money earned by an employee for time spent working during a pay period. Accountants refer to this as Salary ExpenseSalaryHourly WageCommissionSalary plus commission or bonusPiece rate*Some employees are entitled to overtime payPg 311
5 SalarySalary – a fixed amount of money paid for a fixed amount of time regardless of the number of hours worked in that time periodMany managers are paid salary and expected to get a certain amount of work done within a time period without concern for the amount of time it actually takes to complete itEx: Paula earns $2,000 a month. Some months she works 160 hours and some she works 170 hours but still is paid $2,000 for the work that is expected.Pg 311
6 Hourly WageWage – an amount of money paid to an employee at a specified rate per hour worked.The hourly rate is multiplied by the hours worked to come up with a gross payHours are usually recorded in increments of quarters (every 15 minutes) and rounded to the nearestEx. $7.25 per hour * hours = $99.69 gross payHours worked are usually recorded on a time card that keeps track of time in and time out of an employee.Electronic Badge Readers – The employee scans his/her badge and the computer records the time in and out.Pg 312
7 Other Methods of PayPg 314Commission – an amount paid to an employee based on a percentage of the employee’s sales.Commission encourages employees to sell more because their compensation is in direct correlation to the amount they sell.Salary Plus Commission – an employee is paid a set amount and then can earn additional pay based on salesPiece Rate – manufacturing companies pay employees based on the number of items produced.Overtime Pay – an additional amount paid to hourly employees when they work more than the legal limit of standard pay. (1.5 x’s hourly rate for any hours over 40 per week.)
8 Payroll DeductionsDeductions – an amount subtracted from gross earningsFederal Income Tax – a tax based on earningsForm W-4 – Filled out by the employee to help determine how much money will be deducted.Marital statusNumber of allowances (withholding allowance)Gross earningsWithholding Allowance – the more allowance you claim, the less you have deductedTax Tables help you determine how much money should be deducted each pay periodPg 316
11 FICA Taxes FICA Taxes are a set percent of total earnings Social Security Tax – provides funding to certain individualsThe old and disabledSurvivors of deceased workersMedicare Tax – finances health insurance benefits for people who are elderly or disabled.Ex. Social security tax 6.20%Medicare tax 1.45%Total FICA taxes 7.65%
12 State and Local Income Taxes Most states have an income tax in addition to the federal income tax and FICA taxes.Some communities (cities) have an additional tax in addition to the federal income tax and FICA taxes.
13 Voluntary DeductionsEmployers will usually agree to withhold additional amounts from and employee’s check until otherwise notified not to.Union DuesHealth insurance paymentsLife insurance paymentsPension and other retirement contributionsCredit union deposits and paymentsU.S. savings bonds and charitable contributions401(k) plan – a popular voluntary payroll deduction that is a pre-tax retirement contribution.
14 Preparing the Payroll Register Payroll Register – a form that summarizes information about employee’s earnings for each pay period.Identification informationEmployee’s I.D. numberNameMarital statusNumber of allowances claimedTotal HoursRate of payEarnings (regular, overtime, total)DeductionsNet Pay – How much the is left after deductions have been subtracted from Gross PayCheck numberTotalsPg 321
16 Paying Employees Payroll checks are issued to employees If a small company then many times employees are paid from the general accountIf several employees, most companies will have a separate payroll bank account. The total amount of the payroll is transferred to the payroll account and then checks are issued using the money in that accountPayroll checks have stubs attached showing the gross earnings, deductions and net payDirect Deposit – If an employee has direct deposit, then they are give proof of the deposit and a list of deductionsPg 322
18 The Employee’s Earnings Record Employee’s Earnings Record is a file on each employee documenting his/her pay and deductionsAccumulated Earnings is also listed on the employee’s earnings record. It is a running total of earnings for the year.Businesses usually keep these on a quarterly basis and then carry the totals forward to a new record.Pg 323
20 Managerial Implications for Payroll Accounting Wages and salaries are a large part of a company’s expenses.They should be done with the utmost careThe process should have internal controls to prevent errorsPg 324